
Class _Vi6ail_ 

Book -HJ^ 

Ccpiglit^l" 

COPYRIGHT deposit: 



TWENTIETH CENTURY TEXT-BOOKS 



EDITED BY 



A. F. NIGHTINGALE, Ph.D., LL.D. 

SUPERINTENDENT OF SCHOOLS, COOK COUNTY, ILLINOIS 
FORMERLY SUPERINTENDENT OF HIGH SCHOOLS, CHICAGO 



TWENTIETH CENTURY TEXT-BOOKS 



FIRST LESSONS IN 
FINANCE 

(SCHOOL EDITION OF 

FUNDS AND THEIR USES) 



BY 



FREDERICK A. CLEVELAND, Ph. D. 

WHARTON SCHOOL OF FINANCE AND ECONOMY 
UNIVERSITY OF PENNSYLVANIA 



IVITH MANY ILLUSTRATIONS 




NEW YORK 

D. APPLETON AND COMPANY 

1903 



THE LIBRARY OF 
CONGRESS. 

Two Co^Jies Received 

SEP 23 t903 

^Copyrighl Entry 

CLASS CL 5(Xc No 

COPY B. 



CGA 



Copyright, 1903 
By D. APPLETON AND COMPANY 



PREFACE 



Except in its public aspects, the subject of finance has 
received little attention at the hands of writers. The neces- 
sity for funds with which to carry on King William's war 
with France gave rise to the Bank of England and, with 
it, to modern funding methods. JSTearly all of the great 
banks and banking systems of the past have grown out of 
public rather than private needs. So constantly has atten- 
tion been drawn to funding measures of Government, that 
the words " finance " and " funds " have come to be associ- 
ated almost exclusively with public affairs. The fast in- 
creasing funds in private institutions, the magnitude of 
modern industrial and commercial undertakings, the large 
funding operations wholly private in their character that 
have gone along with private enterprise during the last dec- 
ade, have awakened an interest in private finance far ex- 
ceeding that which attaches to public revenues and expendi- 
tures. Kecognizing the need for the collection and coordi- 
nation of data in this branch of the subject, effort has been 
directed toward the development of a literature such as 
may bring the facts of financial life within the reach of the 
reading public. This larger work was undertaken some 
years ago in cooperation with Dr. Edward S. Meade, of 
the University of Pennsylvania. The present essay is the 



VI PREFACE 

first of a series aiming to give a wide survey of the field 
of finance. 

Looking upon the Subject of private finance as one 
which has to do with the getting and spending of funds 
for private enteTprise, the materials of this book have 
been grouped around three central ideas, viz. : (1) What 
are Funds ? (2) How Funds are Obtained. (3) The Insti- 
tutions and Agencies Employed in Funding Operations. 
The more technical fields of financiering — the several de- 
partments of financial operation — are reserved for subse- 
quent essays. In Part I the various forms of money and 
credit used as funds, and the means of transfer of credit 
funds, are discussed. An understanding of the nature of 
funds is regarded as fundamental. Part II, which has for 
its subject " How Funds are Obtained," divides modern 
funding methods into two classes, namely, (1) the methods 
of the industrially and socially dependent, and (2) the 
methods of the industrially and socially independent — i. e., 
those who depend upon active participation in business. 
The only method by which the former may obtain funds 
is that of gift and inheritance^ which is the title of Chapter 
lY; in this the consideration is one of personal attach- 
ment and direct appeal. The funding method of the 
second class, those actively cooperating in industrial life, 
is that of exchange. The consideration for exchange is 
one of " value." In business there is but one way of 
obtaining funds — that is, to have something to sell, some- 
thing for which those having funds are willing to ex- 
change them. To this method several chapters are 
given. Those without capital or other property must 
resort to sales of labor. The limitations of the laborer, 
the advantages of education and industrial training, and 



PREFACE vn 

savings as a means of obtaining industrial capital, are 
some of the important considerations for this class. Those 
possessed of property or established business may avail 
themselves of methods which are made the subject of the 
three concluding chapters of Part II. For illustration of 
instruments and methods, those actively employed in the 
market-place have been used. In their reproduction, how- 
ever, it has been necessary to reduce all exhibits to type- 
page dimensions. Engravings of checks, notes, scrip, 
drafts, etc., are about one-fourth of the size of the originals 
from which they are made. Stocks, bonds, and the larger 
security documents are in some instances reduced to one- 
eighth of their original size. In Part III a chapter has been 
given to each of the leading financial institutions. The 
labor of collecting the data and illustrations in many cases 
must have proved fruitless had it not been for tha friendly 
assistance of those in control of financial concerns, and 
those in possession of instruments acquired by years of con- 
tact with financial life. In this relation I am especially 
indebted to Mr. Charles C. Harrison, Jr., of the banking 
and broking firm of McMichael & Co. ; Mr. John C. Daw- 
son, of the banking house of Brown Brothers ; Mr. L. G. 
Fouse, President of the Fidelity Mutual Life ; Dr. Stewart 
Culin, Curator of the Free Museum of Arts and Sciences 
of the University of Pennsylvania ; Mr. Herbert G. Stock- 
well, and Mr. H. A. Chambers. 

F. A. C. 

University of Pennsylvania. 



CONTENTS 



CHAPTER PAGE 

I.— Introductory » 1 

PART I 

WHAT ARE FUNDS? 

II. — Money funds . . . . » 11 

III. — Credit funds o ... 30 

IV. — Instruments of transfer of credit funds . . , 55 

PART II 

HOW FUNDS ABE OBTAINED 

V. — Funds obtained by gift and inheritance. ... 79 

VI. — Funds obtained by exchange ...... 89 

VII. — Funds obtained by sales op commercial credit . . 109 

VIII. — Funds obtained by sales of long-time paper . . , 149 

PART III 

INSTITUTIONS AND AGENTS EMPLOYED IN FUNDING 
OPERATIONS 

IX. — The United States Treasury ...... 195 

X. — The savings-bank 209 

XL — The building loan association 239 

XII. — The commercial bank 240 

XIII. — The trust company 256 

XIV. — The broker and the brokers' board .... 265 

XV. — The insurance company 282 

Index 299 

ix 



LIST OF ILLUSTRATIONS 



PAGE 

Copper-sheet money 19 

Silver-sheet money 23 

Note of first Bank of United States 43 

Note of second Bank of the United States 43 

Note of Southern Bank of Kentucky . 43 

Note of Exchange Bank of St. Louis , . .44 

Note of Tioga County Bank 44 

Certificate of Chattanooga Savings-Bank 46 

Clearing-house certificate 46 

Scrip of Easton & Wilkesbarre Turnpike Company . . . .47 

Sutler's scrip 47 

Store scrip ' . .48 

Camden & Woodbury Railroad scrip 48 

Chesapeake & Ohio Canal scrip 49 

Marion Change Association scrip 49 

Patapsco Bank certificate of deposit 49 

Dividend warrant 50 

Town scrip of Fayetteville, Ark. . . 51 

Scrip of Port Deposit 52 

Port Deposit loan, 1862 52 

Check of Pulaski JSational Bank 56 

Andrew Jackson's check on Bank of United States . . . .57 
Daniel Webster's check on Bank of United States . . . .58 

Wages check of Lehigh Valley Railroad 60 

Dividend check 61 

Coal shipper's check * . . . .61 

Receipt used as check 62 

Daniel Webster's power of attorney 63 

Crossed check 64 

Certified check . , 65 

Cashier's check 66 

Bank draft, Bank of United States 67 

Express money-order 68 

xi 



Xli LIST OP ILLUSTRATIONS 

PAGE 

Letter of credit . .69 

Draft list to letter of credit 70 

American Express Company's traveler's cheek 70 

Brown Brothers' traveler's check 71 

Identification signature on same 72 

Knauth Nachod & Kiihne's traveler's check . . . . . 73 

Interchangeable bank money-order 74 

Share of stock in Bank of United States 97 

Common stock of United States Steel Corporation .... 99 

Non-cumulative preferred stock 101 

Common stock of Gramercy Finance Company .... 102 

Preferred stock (cumulative) of Gramercy Finance Company . . 103 

Standard Oil Company certificate . . . . . . . 105 

First preferred trust certificate, Reading Company .... 107 

Promissory note (non-negotiable) 112 

" " (without payee) . 112 

" " (negotiable) 113 

" " (negotiable by delivery) . . . . . .113 

" " (joint and several) . ... . . .114 

Interest note 115 

Note with waiver of grace 116 

Signature " His mark " 117 

" Value received " and " without defalcation " 117 

" Credit the drawer " note . . . . . . . . . 118 

Accommodation, credit the drawer note 119 

Assignment of note 121 

" Without recourse " indorsement 121 

Indorsed guarantee 122 

Detached guarantee of note 122 

" Iron-clad " collateral note 123 

Memorandum collateral note 124 

Judgment note (simple form) 125 

Judgment note with power of attorney ...... 125 

Collateral judgment note . . • 126 

Notice of non-payment 128 

Note with waiver notice of non-payment 129 

Protested note 130 

Notarial notice of protest 130 

Notarial certificate of protest 131 

Account stated 134 

settled 135 

" paid 136 



LIST OF ILLUSTRATIONS xiii 

PAGE 

Memorandum of settlement and due-bill 137 

Commercial draft (simple form) 137 

London draft of Bank of United States ...... 139 

Sight-draft . .140 

Documented bill — invoice 142 

Bill of lading attached to draft 143 

Insurance policy on shipment 144 

Draft of Burnham, Williams & Company 145 

Ad\ ice of sale of draft 146 

Balance sheet 152 

Mortgage note 154 

Mortgage securing note 155 

Parti-mortgage receipt . . . 158 

Collateral gold receipt 160 

Collateral trust certificate of Asphalt Company .... 162 

Individual private bond . . 163 

Receipt for money deposited on bond purchase .... 165 

Same, purchase Glen Echo Railroad bonds 166 

Unsecured bond, Bank of United States 167 

Real estate bond 168 

Guarantee of bonds ' . 169 

Individual real estate bond 170 

Guarantee of Reading Terminal bonds 171 

Indorsement of bonds 172 

General mortgage bond of Reading Company 175 

Car-trust bond of the Railroad Equipment Company . . . 177 

Same, American Transportation Company 179 

Debenture bond 180 

Income gold bond 182 

Chesapeake & Ohio purchase money bond 184 

Improvement bond of Reading Railroad Company .... 186 

Bond extension contract 188 

Exhibit in sale of note broker 266 

Release from liability on indorsement 266 

Memorandum of note purchase 267 

Memorandum of note sale 267 

Floor plan of Philadelphia Stock Exchange 275 

Philadelphia board-room of Haight, Freese & Company . . . 278 

Haight, Freese & Company's chart of private wires .... 280 



CHAPTER I 

FUNDS AND THEIR USES— INTRODUCTORY 

Among the first ideas that one gets from early associa- 
tion is a notion of respect for the "property" of others; 
we soon come to know that there is a differ- 
^ ence between those things which we may call 

" our own " and those things which " belong " to another. 
Parental authority within the family first impresses the 
lesson ; later, association with playmates enforces it. Any 
attempt to violate what are commonly recognized in the 
community as "rights of property" brings us to grief. 
The jealousy with which the child guards his right to use 
his own top, his own marbles, his own knickknacks, and 
the respect which he comes to have for things displayed in 
shop-windows, or in the possession of his playmates, illus- 
trate the force with which ideas of property are early im- 
pressed upon the race. 

INo sooner, however, does the child come to know the 
use of things, or begin to long for objects that attract his 
jj^^ notice, than he learns that the " consent " of 

'property is some one must be obtained before they may be 
acquiie . taken. From a parent, a sister, or a brother — 
members of the household — this consent may be had for 
the asking ; within the family, acquisition takes the form of 
"gift." From others, however — those not bound by ties 
of affection or mutual regard — a mere request is not suf- 
ficient. In front of a shop is a basket of apples. Their rich 
1 1 



2 FUNDS AND THEIR USES 

color and fragrance suggest to the child passing that he 
would like to have some of the fruit. He asks the shop- 
keeper — seeks to obtain an apple " bj gift," as he had been 
accustomed to do at home. His request is refused. How 
is he to obtain the coveted fruit? The shopkeeper helps 
him out of the difficulty. " Have you a penny ? " " No." 
" H you will get me a penny I will let you- have an apple." 
With this suggestion the boy has his first idea in finance. 
He runs to his father, obtains a penny " by gift," and, 
returning, "exchanges" it for an apple. Thus he learns 
how the " consent " of shopkeepers may be won, and that 
this is a second method by which the property of others 
may be acquired. 

Exchange lies at the foundation of the world's industrial 
progress. The story of Crusoe serves well to illustrate the 
possibilities of life without it. Among a primitive people 
centuries may be required to obtain the metals needed for 
weapons and a few rude implements. We have but to 
reflect upon the many thousands of things about the mod- 
ern household, each of which contributes a share to comfort 
or pleasure, to realize how incapable man would be to 
provide for himself. How long, for example, would it take 
a man, working alone, to extract from nature a pound of 
iron ? Having the metal in hand, how long must he labor 
to make a needle or a screw ? Few of the common things 
in use to-day could be had at all ; they are each the product 

of hands whose skill has come from years of 
Exchanqe the . i x • • i • -i-i 

chief method experience and traimng, workmg with pro- 

of acquiring cesses and appliances inherited from a society 
piopei y. ^j^^^ j^^g labored for centuries past — a coopera- 
tive society in which, without exchange, cooperation would 
have been impossible. In every instance, increased facil- 
ities of exchange have led to a wider range of social 
and industrial activity. To its development we owe the 
economies of division of labor, the benefits of the fac- 
tory system, the larger return and more intelligent con- 



INTEODUCTORY 3 

trol, coming from differentiation and centralization of in- 
dustries — -in fact, every mile-stone of human progress has 
engraved upon it the significant emblem " Exchange," 

Out of exchange arises the necessity for " funds." In 
business parlance there is probably no word so big with 
Importance meaning as this one. '' If I could get the nec- 
of funds in essary funds," says the blacksmith, " I would 
usmess. build a wagon shop." The grocer does not 

add to his stock of sugar when the price is low " for lack 
of funds." " We are in need of funds," says the building 
contractor to his partner — " we must have at least $1,000 
more to pay our men." " Our funds are running low," says 
the miller's clerk ; " we must realize on outstanding bills, 
or make some other arrangement to meet obligations matur- 
ing on the first of the month." It is out of just such situa- 
tions and just such problems that the business of finance 
arises. " Funds " are the key to business under an economy 
of exchange — a necessary part of business equipment. 

Business is said to be a contest in which every one is 
striving for the same thing. This is not entirely true, yet 
one has but to look out on Broadway or any main thorough- 
fare of a great city to be impressed with the fact that some 
kind of contest is going on. Men are hurrying 

hTl^fJfo to and fro, pushing each other about, each try- 

ousiness f / j. o . 

ing to get somewhere, to do something one does 
not know what. But it is evident that each has something 
very definite in mind and that he is straining every nerve 
and muscle to accomplish a purpose. What is it that brings 
these millions into the street, takes them to the shops, 
causes some to stand behind counters and others to work 
and sweat before a furnace ? Each seems to be working 
and striving in a different way, but if you ask the clerk or 
the foundry man, the day-laborer or the banker, what he is 
striving for, each will make the same answer. " I am not 
in business for my health," is a saying which expresses a 
great deal of truth. Each one has certain wants and desires 
2 



4: FUNDS AND THEIR USES 

to satisfy. On all sides are found the requisite materials. 
To gain those things which will satisfy desire, in an orderly 
and peaceful way, is the aim of business. Under an indus- 
trial regime, based on exchange, the quest of business is for 
"• profits." The success of a business enterprise is measured 
by its " profits " — i. e., the gains to proprietors made 
through it. Profits, however, are measured by the standard 
of increased or decreased ability to resolve one's property 
into funds. 

A peaceful contest must have rules to govern it, for 
without rules there would be violence between parties. A 
number of marbles are placed within a ring ; a line is 
drawn, behind which each player must stand for the first 
throw ; the one who lands his marble nearest the center 
takes first shot. So the rules are laid down for the begin- 
ning of the game. After the contest is over each counts 
the marbles which he has driven out of the ring. Each 
player has put in two marbles as " counters." At the end, 

one has scored three ; he is one ma.rble ahead, 
law and while the other player has driven out but one 

order w — he has lost a marble. There must be a rule 

for every possible situation and every point at 
issue, otherwise the game could not proceed. The one boy 
would not allow the other to take his marble (his property) 
unless he did it according to rules understood by both at 
the beginning. The same is true of football, baseball, 
lacrosse, every contest for points. Not only must the rules 
be known, but they must also be strictly observed. In case 
of a dispute as to what the rules are, or how they should be 
applied, the parties may come to a subsequent agreement, 
or, failing in this, they may refer the point at issue to some 
one not in the game who knows the rules. He who does 
not play " fair " may have some of his points taken away, 
or, on continued offense, may be " ruled out of the game." 
Business is a contest in which the ''counters" are 
money. Business law is nothing more nor less than the 



INTRODUCTORY O 

rules governing the contest. The honest man is the one 
who plays according to rule. A law-breaker not only runs 
the risk of losing points (i. e., of being "penalized") but he 
may be "ruled out." This may be done by his fellows 
refusing longer to do business with him, or by his being 
" locked up," — put in jail as often as he breaks the rule. 
Business may be a very large game. The whole world is 
the field, and its rules must be understood and observed by 

all who come into common business relations. 
Busmess ^j^g jj^^g ^f business must be common to all 

people trading together, it sometimes happens 
that those known as civiHzed people attempt to do business 
with others who do not understand their rules or who have 
different ones. This is like two sets of players entering a 
football contest, the one trying to play "association ball," 
and the other trying to play "rugby." Two systems of 
business come into conflict. The rules of the one people 
must be made to conform to those of the other or else there 
will be trouble. The common advantages of trade are so 
great that no one industrial group can afford to shut itself 
off. In fact, no barrier is strong enough to preclude men 
from following up a business advantage when it presents 
itself. This brings the people of all nations into constant 
contact. In the conflicts between systems, the stronger 
forces the weaker to change its rules. The importance of 
obedience to rules of business law is so great that nations as 
well as individuals are made to suffer by what is deemed 
a violation of them. That " honesty is the best policy " is 
a saying trite but true. Whatever may be said of the atti- 
tude of one nation toward another, no single individual can 
afford to raise even a suspicion of dishonest conduct, as 
this would cut him off from opportunity and preclude him 
from the advantages offered by broader cooperation with 
his fellows, cooperation made possible by confidence in fair 
dealing. To quote a saying of Mr. Croker, the Democratic 
leader of New York : " ]S"o combination can be made where 



6 FUNDS AND THEIR USES 

all are dishonest and each one knows it. The first element 
of leadership is honesty, perfect honesty. The honest man 
will prevail because other men will trust him. A rascal 
can trust an honest man, but a rascal can not trust a rascal. 
You may take one hundred men, ten of them honest and 
ninety of them false, and put them away on an island; 
come back in two montlis and, for the reasons I have given 
you, you will find the ten men dominating the rest." While 
Mr. Croker is not often referred to for standards of moral- 
ity, his success as a politician has depended very largely 
upon his recognition of the advantage of strict integrity 
among his political followers, and the advantage of fair 
play is even more striking in business organization and 
control. 

In a game, two conditions are prerequisite to success : 
(1) An intimate knowledge of its rules ; (2) Skill in the use 
of the instruments employed. A knowledge of business 
laws, and skill in the use of the instruments and agents by 
means of which " gains " are to be made, are just as neces- 
sary to business success. To the laborer — the one who 
relies for income on the sale of his labor, who subordinates 
his own business or talent to help another work out his 
schemes for gain — a general knowledge of law may be of 
less importance than skill in the use of some particular 
tool ; but he must know enough of the rules to play his 
part well, otherwise he will not be able to render service to 
X.T ^ f the manager to whom he engages himself. The 
success in man who manages a business plant and seeks 
business. income from the sale of its products must 
equip himself in a different way. He may have less skill 
in the use of some particular instrument than has the man 
whom he en;ploys, but he must know the use of instru- 
ments, and know the manner in which they may be used 
by others to the highest advantage in order to direct the 
efforts of his working force in such a manner as to make 
largest gains without breaking rules. Like a football cap- 



INTRODUCTORY 7 

tain, lie must know liow to manage liis men and his plant 
so as to take advantage of every opening. Business is co- 
Funds a operative. A man can not do business alone. 
necessary He must play a part. He must be properly 
business equipped for whatever part he plays. Business 

equipment. training, knowledge of the law, equipment 
adapted to the enterprise, materials, services, all are neces- 
sary, but in obtaining these the first need is for " funds." 
The acquiring of funds (capital), therefore, may be said to 
be the first step in providing for business equipment and 
business success. 

Children are frequently found on the street asking for 
pennies. They have learned the use of money as a means 
of obtaining things desired, but they have not yet risen 
above the most primitive knowledge of how to get money. 
Their fathers and mothers may provide it by gift, as they 
would also provide the things which pennies will buy, but 
those not moved by affection or, as sometimes happens, by 
charity, turn a deaf ear to appeals of this kind. In early 
jp 1 fj, years, "gifts" based upon affection afford a 
subject of means quite adequate, except in cases of inabil- 
fincmce. ^^j ^f parents to provide. Generally speaking, 

girls and women throughout their lives are limited to this 
means of obtaining funds. Many men also pass their lives 
in this fashion — they obtain all things desired by means of 
funds contributed. Those who may not depend upon en- 
dowments of ancestors, and those engaged in active business, 
have quite different financial problems to solve. Finance 
is that branch of business which has to do with the getting 
and spending of funds necessary to the equipment and. 
management of enterprise. A student of finance must first 
consider what is meant by " funds." When a business man 
says that " his funds are running low," what does he mean ? 
Does he mean that his money is nearly all gone ? Perhaps 
he has not had more than a dollar in his purse for a week, 
and has had no particular use for that, yet he has been car- 



8 FUNDS AND THEIR USES 

rjing on a large " cash " business all the time — has had no 
lack of " funds." What are " funds " ? How are they 
obtained ? How are thej managed ? These three ques- 
tions answered, the whole field of finance will have been 
covered. 



PAET I 
WHAT AEE FUNDS? 



CHAPTER II 
MONEY FUNDS 

Experience will at once suggest that what we call 
" funds " must be something that will be accepted by others 
in exchange for their goods or services— i. e., something 
that others regard as valuable to them in their own business 
transactions. Those things which will serve as "funds" 
to one, must have such qualities that they will serve as 
" funds " to others. By way of illustration let us suppose 
that a blacksmith in Springfield wishes to enlarge his busi- 
ness. To that end he begins to accumulate a store of horse- 
shoe nails. Each week he lays by twelve pounds of nails, 
until at last he has a ton of them. This might serve as 
"funds" in a community where every one desires horseshoe 
nails, but in Springfield not one in a thousand can make 
use of them. With this stock in hand he is not able to buy 
bricks, lime, or machinery, or pay for labor. Horseshoe 
nails are not " funds " in Springfield. The blacksmith, how- 
ever, finds a man who can make use of a ton of nails ; he 
exchanges them for ten double eagles of gold. He has sold 
his nails for no other purpose than to obtain something that 
will serve as funds. With $200 in gold he may purchase 
the materials and equipment desired. He has "funded" 
his enterprise. 

The whole system of finance grows out of the economy 
of exchange. Where commerce exists as a feature of busi- 
ness enterprise, where each member of a community strives 
to do that for which he is best fitted, and where each relies 

11 



12 WHAT ARE FUNDS ^^ 

on exchange of things prodaced for other things desired, it 
is to the advantage of each to provide himself with " funds " 
with which purchases and payments may be made. A 
" fund " is a collection, or store, or amount of something 
by means of which purchases and payments may be made. 
The word ''funds" signifies any and all things which may 
be accumulated and which may be currently used in a com- 
munity in exchange for goods or properties of others. As 

has been suggested before, the consent of both 
Fwids^^^^~ P^^ties is necessary to an exchange. That wliich 

will serve as funds must have qualities which 
will induce others to give their consent to part with the 
things which they own, in exchange. Funds that are col- 
lected or stored up to pay living expenses, or for the pur- 
chase of comforts and enjoyment, may be called " main- 
tenance funds." They answer the same purpose for an 
individual that a fund would when laid by for the " main- 
tenance" of a manufacturing plant. Funds that are col- 
lected or provided for business equipment are called " capital 
funds." The capital of a business concern is made up of 
funds contributed to it for permanent use. A money or a 
credit reserve laid by for the payment (sinking) of a debt 
is called a " sinking fund." When money is stored up 
for the purpose of hiding it away, and not for use, it is 
called a " safe deposit " or a " hoard." This, however, does 
not properly come within the field of finance. To " fund " 
an enterprise is to provide the means whereby such pur- 
chases and payments may be made as are necessary to its 
success. One whose business It is to provide funds for 
business enterprise is called a " capitalist " ; the manager of 
funds is a " financier " ; he who hoards money is a " miser." 
A " funded debt " is one for the payment of which some 
definite and adequate provision is made for funds when 
due. To illustrate : A borrows $1,000 from B. A thereby 
procures " funds " for his enterprise ; he funds his imder- 
taking; he secures a working capital of $1,000. The 



MONEY FUNDS 13 

instrument employed to this end is a contract for the future 
delivery of money which he sells to Bior the funds desired. 
But before B delivers the 8I-5OOO to A in exchange for the 
note, he demands that some definite j^rovision be made for 
its payment. Complying with this demand, A executes a 
mortgage on his farm as "security" for the payment of the 
note. The mortgage is a conditional deed to his land, the 
condition being that in case A fails to pay the note when 
due, B may sell the farm, and out of the "funds" thereby 
obtained retain enough to pay the note. In other words, 
A sets aside property in trust, the sale of which will create 
a fund sufficient to pay his debt. 

Funds may be divided into two classes : (1) Those 
things which pass in the community as money ; (2) forms 
of credit,- or contracts for the future delivery 
"^ff -^^""^ of money. These may be given and accepted 
for the purpose of making purchases and pay- 
ments. Both of these forms are a part of a money economy. 
Under a system in which credit is used as a means of pur- 
chase, the necessity for actual delivery of money is in large 
measure avoided. Instead of " money funds " being kept 
on hand by each member of the business community, a few 
individuals or institutions hold a large store of money "in 
reserve," and the business community makes its arrange- 
ments with them for forms of credit which will serve their 
financial needs more readily than money itself. The money 
demands and money uses are largely demands for and uses 
of money for settlement of credit balances. In all modern 
systems of finance, by far the greater part of business enter- 
prise is " funded '' by means of credit. The manner in 
which this is done will appear later. 

Money Funds 

Two qualities or characteristics are essential to money. 
In the first place^ those things which are used as money 
within a given community must exist in such quantities as 



14 WHAT ARE FUNDS! 

to allow the various members of the community to collect 
them into "funds" large enough to make the purchases and 
j^ ,. -. payments necessary for their business under- 
characteris- takings. A people can not use as money that 
tics of money. ^^r\aQ\l they do not possess; the thing employed 
must exist in such quantities that it may be had when 
needed. In the second jplace^ the money commodity must 
be so highly valued by all that it will readily be taken in 
exchange for goods offered for sale. ]N'o two persons may 
place the same estimate of value upon it ; judgments of 
vahie of the money commodity may differ as widely as its 
various uses, bat value it must have in the judgment of all 
with whom exchanges are to be made. Otherwise a busi- 
ness man could not get together, or offer, enough of the 
commodity to cause another to think that he would profit 
by an exchange. 

Conditions on which the Fundability and Value or 
Money Depend 

To this end the things accumulated for use as money 
must admit of being divided with such accuracy as to en- 
able one readily to calculate the amount or por- 
1. A money ^^^^ ^^ which his judgment of value is to be 
admit of di- based. If, for example, some one offers a 

vision into J^orse for $100, it must be known at once just 
units. 111.. ■\ c 

how much gold is intended before one. can 

form a judgment as to whether he would prefer the gold or 

the horse. The money offered must admit of division into 

comparatively uniform units. In a pastoral community 

sheep may be used as money; a flock of sheep may be 

divided into units. One hundred sheep or fifty sheep have 

a very definite meaning. There is uniformity enough 

about the primitive sheep to satisfy the judgment of the 

primitive man. Then, instead of judging the comparative 

values of a goat, an ox, a horse, and a stack of fodder in 

terms of dollars as we do now, the party having all of these 



MONEY FUNDS 15 

things for sale might offer the goat for 5 sheep, the ox for 
10 sheep, the horse for 20 sheep, and the stack of fodder 
for 15 slieep. Each member of the community having 
sheep would then have to consider whether 5 sheep would 
be of greater value to him for purposes of trade or for 
other use than the goat; whether 10 sheep would be more 
useful than the ox, etc., and on the result of his judgment, 
in the bickerings among those making estimates and off^ers, 
would depend the agreement as to price. 

Since prices must be made and quoted in terms which 

will be understood by others, it becomes necessary to have 

some common standard of judgment in esti- 

f'ujids must mates of value. Without such a standard one 

be uniform trader would not be able to make himself un- 

171 quaLity. 

derstood by another. If I were to ask you the 
value of a certain piece of land, you would not be able to 
express your thought or conclusion in answer to the ques- 
tion unless you could appeal to some standard or measure 
of value which was known to me. The same is true in 
making a trade. In this case the one offering goods for 
sale does not volunteer his estimate of value, hut by offer- 
ing the goods for a definite sum of money both parties find 
in the price a common standard for judgment. Unless, 
however, the money funds in which the offer is made are 
uniform in quality there can be no judgment as to the rela- 
tive value of the thing offered and of the price to be 
received. In other words, as between the various units 
which go to make up the money fund, the judgment of 
value must be practically the same. AVithout uniformity, 
such expressions as a dollar, a sheep, a bushel of wheat, or 
whatever the thing used as money, would have no uniform 

The thing used must likewise have such durability as to 
protect it from immediate decay. There must be no fear 
of loss or damage while the thing used is held in the form 
of funds. Lack of durability would render uncertain all 



16 WHAT ARE FUNDS? 

judgments of value for future use. It would make exchange 
^ -,, itself so far a subject of chance as to render 

ftmds must impossible all estimates of an advantage to be 

have dura- a o-ained " from a business transaction. When 
bihty. ^ , 

calculation of value for future use is made diffi- 
cult, exchange as a regular part of the industrial system is 
hampered. 

Money funds must be adapted to being carried about or 
passed from one person to another without great inconve- 
nience. J^othing can serve as money unless 
fu'^s^must ^^^ fund, accumulated, can be easily handled. 
admit of Lands, houses, and country estates can not be 
^ahout'''''''''^ used on this account. There are other quali- 
ties which may add to the value of a thing to 
be used as money, but the foregoing may be said to be 
necessary to adapt it to the purposes of exchange. Each 
and all of these qualities must be possessed to some extent. 
Some things are more easily carried about than others ; 
some are more durable than others, while some may be more 
uniform or more easily divisible, but no one of these charac- 
teristics must be wholly wanting in the thing used as 
money. The greater the degree in which all are present, 
the more serviceable will be the substance employed. 

Things that have been used as Monet 

In a given community those things will be used for 

money that will give greatest ease to exchange. Among 

one people, each family may grow a little corn, may have 

a few horses or cattle, may possess various rude weapons 

or utensils for domestic use, may also have provided for 

themselves shelter. They, however, are a 

hunting people ; meat is perishable ; for long 

periods they may be entirely without corn. At times 

horses may be had, but they are not obtainable by all ; 

weapons are in great variety and size, and adapted to the 

strength and skill of those using them. The tribe is migra- 



MONEY FUNDS 17 

tor J and often changes its location. Among such a jDCople 
the things best adapted to serve as money may be the skins 
of animals. 

Another people may live under quite similar conditions, 
except that they get a large part of their substance from 
fishing. The things that best lend themselves 
to their use as money are dried and smoked fish 
or clams. These will last for years, and there is always a 
demand for them as food. When fish are scarce the dried 
products will be more highly valued ; when plentiful, they 
will be prized less ; but at all times they will have some 
value due to their usefulness and to the labor entailed in 
procuring more. 

Under other circumstances a people may develop a pas- 
toral life. With them their flocks and herds furnish that 
, , which serves them best as monev. Many of 
our financial terms have come from such a prac- 
tice : jpecus was the Latin name for kine — cattle ; pecunia 
came to be the Latin word for money ; we have from this 
such words as pecuniary, pecunious, impecunious, pecula- 
tion, etc. They counted their money (cattle) by the head 
(per capita), and their kine were their capital. Our money 
is our capital ; our goods are our chattels ; our kine are our 
cattle. In old England scot was a tax or fee ; this presu- 
mably came from the Saxon scot^ meaning cattle, and " scot " 
was used when taxes were paid in kind. Our expression, 
to go " scot free," comes directly from this use of the word 
— that is, free from taxes or fine. 

In communities where agriculture prevailed, some forms 
of agricultural products were found to be most serviceable 
in making exchange ; wheat, oats, and barley 
products. were used in Lurope lor centuries ; maize was 
employed among the Indians of Central Amer- 
ica ; where olive-oil, cakes of dried fruit, cocoanuts, and tea 
have been largely produced they have served peoples as a 
means of exchange. 



18 WHAT ARE FUNDS I 

Both the advantages and disadvantages of the use of 

these primitive forms of money are apparent. By their 

, , , use many of the economics of exchange were 

and disad- secured and many of the difficulties of barter 

vantages m ^ere overcome ; but still commerce could not 

the use of ' 

these forms be carried on with ease. All of the things used 

of money. possessed the qualities essential to money, but 
none possessed them in high degree. All had qualities 
which caused them to be valued, but judgments of value 
varied widely with each individual. All admitted of divi- 
sion, but division, in most cases, could not be made with 
exactness. There was little uniformity, therefore judgment 
was hampered as to the value of a unit of kind. Their 
durability was not great. Many of them could not easily 
be passed about from hand to hand. Yet, with all these 
faults and disadvantages, they were the best that the people 
using them could provide ; it required centuries of social 
and industrial progress for these peoples to acquire those 
things which would serve them better. 

Every increased facility given to exchange gives a wider 
range to social, political, and industrial activity. With the 

growth of intelligence, with the higher devel- 
metals. opment of industrial processes and artistic skill, 

metals were brought into use w^hich possessed 
qualities better adapted to serve as funds. Copper, tin, 
iron, zinc, brass, and other alloys, came to have currency. 
Even when these were comparatively scarce, they were to 
be had in such quantities as to allow the accumulation of 
" funds " sufficient to serve the community in exchange, 
and were so far superior to agricultural products that the 
latter became supplanted. Iron was at one time used ; 
but when iron came to be so plentiful that it was used 
for weapons, household implements, plowshares, etc., the 
estimate placed on the value of iron, as compared with 
other things, was so small that one could not easily accu- 
mulate and carry about a fund large enough to make 



MONEY FUNDS 



19 



the necessary purchases of the goods. Thus, with increased 
use of iron for other purposes, it became unfit for use as 




money, because of the great amount necessary to an ex- 
change — i. e., it lacked so far the element of convenience 
3 



20 WHAT ARE FUNDS? 

that other metals were preferred. In time, the same came 

to be true of tin, zinc, and to a large extent of copper, 

brass, nickel, and other metals. A good illustration of the 

inconvenience attending the use of copper is furnished in 

the cut on page 19. The copper sheet from which the 

engraving was made is 14 inches long, 9 inches wide, and 

weighs 7 pounds. It bears the stamp of a Swedish sovereign. 

It may be called a Swedish four-dollar-bill of lYM. Imagine 

taking a few of these to market to do a little shopping ! 

Strange as it may seem, the world's best moneys have 

come from materials used for ornament. This, however, 

^ ^ follows naturally. The desire for ornamenta- 

Ornaments. . . it- j» i • r- 

tion IS general. It arises out oi a desire for 

distinction among one's fellows. Those things that are 
used for decorative purposes are things not common. 
Things that will serve a particular people for ornament 
will be desired by all — that is, they possess qualities which 
will cause them to be highly valued. In both money and 
ornament the element of value brings them into close rela- 
tion. If the things desired for decoration possess the other 
qualities essential to money, the two uses may be concur- 
rent. Fishermen have polished the vertebrae of fish and 
used them for beads ; the American Indian has polished the 
ends of black and white shells and strung them ; wampum- 
peag (sometimes called wampum, or peag) was used for 
money by the Indians. In Massachusetts, when the money 
which the English people were used to became too scarce 
to serve them in their exchanges, they reverted to the use 
of the Indian wampum ; the general court of that colony 
made this legal-tender currency among the settlers at a fixed 
rate to the amount of 40 shillings. Ornaments of various 
kinds have been used for money. Many of them have 
great durability; they accumulate from one generation to 
another until they are possessed by members of the tribe 
in quantities sufiicient to answer the purposes of money. 
When these things serve exchange better than the less 



MONEY FUNDS " 21 

durable products, tliev often come to be the only money 
used. 

Gold and silver were first used for ornament alone. For 
many centuries they were too scarce to serve as money — to 
be accumulated as money funds. This is still 
silver?^ true among some peoples. These metals finally 

came to be the generally accepted money in 
civilized nations. Under modern industrial conditions these 
metals are in every way better adapted to money iises than 
other materials are. They are universally prized ; they ad- 
mit of accurate division, and units of value may be exactly 
determined ; they are easily refined, and may be given exact 
uniformity of quality ; they have great durability, do not 
easily corrode ; they exist in quantities sufficient for cur- 
rency, but are not so plentiful that it is necessary for a 
trader to encumber himself in his effort to have on hand 
a store large enough to effect exchange ; funds of gold 
and silver being highly valued may be easily passed from 
hand to hand. For these reasons they are more useful as 
money in civilized communities than the " baser metals." 
They also serve better than the other " precious " metals ; 
better than platinum, because platinum is too scarce ; dia- 
monds and precious stones are easily broken and destroyed, 
are not divisible into equal parts, are not uniform in qual- 
ity. Gold and silver not only possess the qualities essential 
to money in a high degree of perfection, but also admit of 
stamps and other marks of authority which give certainty 
as to weight and fineness. Coins made of these metals are 
easily distinguished from counterfeits ; they have charac- 
teristics which permit traders most easily to arrive at a con- 
clusion as to value and to agree on a price. 

With all primitive people several commodities are in- 
discriminately used as money. Such a money system mul- 
tiplies the difficulties of exchange. If skins be used, then 
an ox may, by one man, be estimated as having a value 
equal to 10 bearskins ; another may compare the value of 



22 WHAT ARE FUNDS? 

the ox to 20 raccoon skins ; a third may use the fur of the 
mink as his basis of comparison ; a fourth, having an as- 
sortment of skins, might offer 2 bearskins, 6 raccoon skins, 
The develop- ^^ i^i^k skins, and 16 skunk skins. With such 
ment of a a money it is difficult to come to a conclusion 
standard. -^^ trade. Commercial transactions become in- 
volved ; the bickering necessary to a sale is a long process. 
Exchange with such a money would be little better than 
barter. Metallic money may quite as much encumber a 
transaction. Before the development of a system of exact 
coinage the money metals often had stamped upon them 
marks of private houses or of government which guaranteed 
their fineness. They were then clipped up or cut into pieces 
to serve the purposes of the transaction in which they were 
used. The illustration on the next page is a copy, slightly 
reduced, of a Japanese sheet of silver bearing such marks 
of guarantee; in whatever way it might be cut, each piece 
would still carry with it a stamp. After a system of ex- 
act coinage was introduced, the problem of the different 
values placed upon each metal had still to be solved. A gold 
coin and a silver coin might each bear the stamp of " one 
pound sterling," yet each would pass at a different valuation. 
Each metal added to the currency increased the confusion. 
Attempts have been made to avoid this trouble by using 
a fixed legal ratio between coins of different materials. 
Such devices, 'however, have often proved futile, for traders 
were constantly passing judgment on the comparative values 
of the coins used, and when the values of these did not 
correspond with the ratios intended, each stipulated the 
metal he would receive in exchange. After many failures, 
an expedient was hit upon which allowed several kinds of 
money to be used at the same time and all of the estimates 
of value to be compared with one metal. This was done 
by what is known as " the establishment of a standard." In 
a complex system of money, the standard is a coin composed 
of a certain amount of metal of a particular kind, having 



MONEY FUNDS 



23 



prescribed weight and fineness, for which all other coins 
may be exchanged at a fixed ratio. The weight and fine- 




24 WHAT ARE FUNDS? 

• 

ness of the other coins are also prescribed, but it is by a 
process known as redemption that their relative values and 
ratios of exchange are maintained. It is this device that 
lies at the foundation of modern graduated systems of 
money. 

As before observed, the evolution of the modern money 
system is a long and involved process, one dependent upon 

the development of higher intelligence, broader 
The decimal association, and improved methods of social, 

political, and industrial cooperation. With 
modern methods even barter would not be as cumbersome 
as money exchange under more primitive systems. In fact, 
modern facilities for comparison of wants and of goods by 
advertisement and other means of intelligence, allow of 
many things being exchanged by a system of barter in pref- 
erence to sale and purchase. Some newspapers and circular 
publications are devoted to this, and their support is the 
best testimonial to their success. With all our improved 
processes, however, with all our modern adaptations, there 
are still many of the old difficulties that persist. A com- 
parison of the complex, lumbering English system of money 
with our own will serve to illustrate the economies intro- 
duced by later experience and better adaptations. Ex- 
changes and accounts in pounds and shillings and pence 
necessarily burden English commerce with an enormous 
expense of time and energy. It is a burden similar to a tax 
on trade. If the amount of time that is saved to our 
nation by the decimal system of money were to be com- 
puted, the result would be startling. Let us assume that, 
by means of the decimal system, twenty minutes per day 
were saved to those engaged in commercial transactions 
and accounts; with 5,000,000 people employed in this 
manner, there would be an economy of over $100,000,000 
per annum. In the United States, however, we are still en- 
cumbered by older systems of weights and measures. It is 
to be hoped in the interest of economy that a decimal system 



MONEY FUNDS 25 

may ultimately be adopted for these calculations. Another 
economy in exchange that has been worked out by Americans 
comes through our broader social, political, and industrial 
organization. Throughout the United States and Canada we 
have practically one standard and one system of money. The 
business of this Continent is freed from the multiplicity of 
computations necessary to deals in Europe and other parts 
of the world. Gradually the world is working toward uni- 
formity in standards and uniformity in monetary systems. 
The result is a higher economy — increased facility in mak- 
ing commercial judgments, and increased advantage in com- 
mercial exchange. 



The Money System of the United States 

The central idea of the American money system is the 
" dollar." What is a dollar ? This question has been the 
„ subject of volumes of discussion. The answer 
—The central to the question has become involved in a wilder- 
fact in our negg of theory — lost in a maze of abstractions — 
sys em. ^^ ^ result of which the reader is led to believe 

that there is great difficulty in understanding just what a 
dollar is. Fortunately we do not have to read all this 
literature and wrestle with all the hypothetical problems 
propounded. The whole matter is settled by one section of 
the United States statutes. The Act of February 12, 1873 
(Sec. 14), establishes "25.8 grains of gold" ^Wo ^^® (^^ 
23.22 grains of fine gold), which bears the required stamp 
and impress. The statute says that this is a dollar — not 
that it resembles a dollar, or that, for the purposes of discus- 
sion, it may be considered a dollar, but that it is a dollar. 
Furthermore, the statute again cuts off all controversy 
regarding the worth of a dollar ; for it says that the dol- 
lar (the printed piece of gold containing 25.8 grains of 
gold -f^-^^ fine) "shall be the unit of value ^^ in our money 
system, 



26 WHAT ARE FUNDS? 

But what about the other forms of money in our com- 
plex system ? In the first place, there are six kinds of gold 
Gold coins of ^^^^' ^^^"> *^^ " dollar," the " quarter-eagle," the 
the United " three -dollar " piece, the " half -eagle," the 
States. "eagle," and the " double -eagle." What about 

these ? They must contain exactly the proportions of 1, 2|^, 
3, 5, 10, and 20 in weight of gold of uniform fineness (iVw)- 
The statute does not provide how much the several pieces 
enumerated shall be worth. But the weight and fineness of 
metal being established for each, they pass in the com- 
munity and are "valued" by business men at $2.50, $3, $5, 
$10, or $20, as the case may be. That is, a piece of gold 
which has 51.6 grains of gold is valued at just twice as much 
as a piece containing 25.8 grains. If, therefore, the latter is 
one dollar, the former would be valued at $2. They all pass 
" at par " by virtue of this exact proportion of gold having 
the same quality and fineness, and thus the "three-dollar" 
gold piece will pass interchangeably for three " one-dollar " 
pieces. 

We also have in our system "silver dollars," "half- 
dollars," "quarters," "dimes," etc. The statute prescribes 
Silver coins 1^®* ^^^ much silver there shall be in each, of 
of the United -^qW fine, and what stamp and impress shall be 
States. p^^ ^^ them. The law does not attempt to pre- 

scribe how much these coins shall be worth ; it simply makes 
provision for their form, weight, and fineness. The Gov- 
ernment also holds itseK ready to exchange a silver "dollar" 
for a gold " dollar," and with this lets each man decide for 
himself how much it is worth. 

Minor coins are also a part of our metallic money 
equipment. The five-cent pieces, "nickels," and "cents" 

add to convenience in makin^r exchansje. 

Minor C0171S. ,, _„, . . . , -, , n ,, .. ~m-i . ^ „ 

" What is a ' nickel ' ? " or " What is a cent ? " 

may be determined in the same manner as " What is a 

silver dollar ? " They are pieces of metal, of definite 

form, weight, and quality, which the Government agrees 



MONEY FUNDS 27 

to exchange for gold coins at the rate stamped on their 
faces. 

Besides the gold, silver, nickel, and bronze metallic 
moneys there are nine classes of paper moneys in circula- 
p . tion, each of which has a definite provision for 

money in form and design. Paper money is issued in 
circulation, denominations of $1, $2, $5, $10, $20, and 
higher multiples. Each is in the nature of a promise of the 
Government, directly or indirectly, to deliver the number of 
dollars (gold) for which it is issued. The United States notes 
1 United (greenbacks) are promises of the Government 
States notes to pay to the holder a definite number of gold 
or greenbacks. ^^ g-j^^j. ^^^j^^g u ^^ demand." For example, 

a "two-dollar greenback" is one which has written upon it 
the promise of the United States to pay to the bearer on 
demand two gold or silver dollars. Silver dollars, however, 
are exchangeable for gold whenever gold is desired. There- 
fore it is entirely optional with the holder as to which will 
be received. 

A national bank-note is a promise of a national bank to 
pay to the holder, or bearer, on presentation, the amount 

named in the bill in legal-tender money of the 
I'anCnot^f United States— i. e., in gold, silver coins, or 

greenbacks. This makes the bank-note indirectly 
convertible into gold at the option of the one owning or 
holding it. 

The Government, recognizing the inconvenience of car- 
rying about a large fund of gold, has made provision for 
the deposit of gold funds in the Treasury, either as coin or 

bullion, in any amount in which they may be 
%rfincates accumulated, against which an equal amount of 

gold certificates, or certificates of gold deposit, 
is issued. Thus one holding the certificates may, " on de- 
mand," have the gold "dollars" or the money value of 
bullion deposited. 

The silver certificate is issued for a similar purpose. 



28 WHAT ARE FUNDS? 

Silver money is about sixteen times as heavy as gold money. 
To carry about a large fund of it becomes impossible ; even 

small sums are very inconvenient to handle. By 
4. Silver allowing a deposit to be njade and certificates 

of deposit to circulate as money in their stead, 
the public is served in every manner the same as by the use 
of the coin. At the same time, if gold is preferred, they 
may be exchanged for gold when presented for payment. 

Similar privileges were formerly given to owners of silver 
bullion. Instead of requiring the owner to have his metal 

coined before putting it into circulation, the 
noieslTisio Gro^ernment allows him to deposit the bullion at 

the coinage value and receive certificates which 
entitle him to withdraw silver coin. Thus the Government 
has the metal for coinage if occasion requires, but is not put 
to the necessity of coining it. The certificate is indirectly 
exchangeable for gold "dollars" in the same manner as "sil- 
ver certificates." The process is only one step farther 
removed. 

The holders of small denominations of "greenbacks" 
find that it takes a long time to count out large sums with 

accuracy. As a means of avoiding this, small 
6. airrency ^'Hg ^^ deposited to the amount of $10,- 

000 or multiples thereoi, and one or more bills 
or " currency certificates " may be issued to represent the 
amount deposited. Thus, for the transfer of $1,000,000 it 
would require only one hundred bills of the lowest denom- 
ination. These, as may readily be seen, are indirectly ex- 
changeable for gold. 

Fractional currency notes were issued for small change 
during the civil war when gold and silver were scarce. 
„ -n V 7 Thev were issued in fractions of a dollar, and 
currency were derisively called " smnplasters." They 

notes. have been canceled as fast as presented at 

the Treasury, but there are still about $16,000,000 out- 
standing. 



MONEY FUNDS 29 

Old demand notes and compound interest notes are 
forms of currency similar in character to the 
mand notes, greenback, except that the latter bears com- 
9. Compound pound interest at the rate stated in the contract. 
interest notes, rj.^^^ ^^.^ ^^ ^^^ ^^^^^.^ ^f promises of the Gov- 
ernment to pay on demand gold or silver in exchange. 

In none of these forms of moi^ey does the Government 
attempt to say how much it is worth. It simply deter- 
The uniform- ^^^^^ what a " dollar " is — i. e., it represents 
ity of value that a dollar is a coin of the Urdted States con- 
m our system, ^^^^i^^g ^j^^^ g^^^^^^ of f/iie goldwiih onQ-iQni\i 

of alloy to prevent abrasion. It then agrees to exchange 
all forms of money, other than gold, for coins of that 
metal, and supplies itself with a reserve fund of gold to 
this end. The public is left to place its own value on the 
gold " dollar " as well as on all other coins and bills in the 
system. The process of redemption operates to make the 
estimates or valuations of all kinds of dollars alike. The 
value of a " dollar " of any kind is therefore the value of 
23.22 grains of pure gold. 



CHAPTEK III 

CREDIT FUNDS 

Credit is a contract made between two parties whereby 
the one promises to deliver a certain amount of money to 
the other at a specified time. This contract, or promise, 
may be written or oral, formal or informal, expressed or 
implied, but in each case the essential fact is the same — a 
contract for the future delivery of money. A " credit 
transaction " is one in which a promise to pay (i. e., a con- 
tract for future delivery of money) is ex- 

Defimtion of chane^ed for something else of value. When 
credit. ^ ^ 

one deals " on credit," he deals on his own 

promises to pay, or contracts for future delivery, instead of 
money ; when one buys for (or on) credit, he purchases 
goods and gives his obligation to pay in exchange ; when 
one sells for (or on) credit, he transfers his goods to another 
in exchange for the promises of that other to dehver a defi- 
nite sum of money at a definite future time. 

Illustrations of Credit Uses 

Morgan is a young man of sober, industrious habits, is 
well trained, and has a good reputation in the community 
where he lives. He decides to begin business for himself. 
He goes among the farmers with whom he is acquainted, 
and asks them if he may become their agent for the sale 
of grain in Chicago. A list of clients is scheduled whicli 
seems to warrant the opening of an office. But he has no 
capital, and it will require at least $1,000 in "funds" to 
equip and manage an office where he can display his sam- 
30 



CREDIT FUNDS 31 

pies, meet prospective buyers, manage consignments, etc. 
He la^^s liis plan before his friend Drexel, who has an 
abundance of means and who makes it his business to sup- 
ply funds to those who have need for them in business. 
Morgan explains his plan, shows his assured list of clients and 
his business prospects, and proposes to Mr. Drexel that if he 
will give to him $1,000, then he (Morgan) will execute to 
Drexel a contract in writing for the delivery of $1,100 one 
year hence. Mr. Drexel has confidence in the integrity of 
young Morgan, and after studying his plan of undertaking 
and his prospects of success, he decides to exchange $1,000 
for Morgan's contract to deliver $1,100 one year hence. 
ISTo money passes, however. Morgan hands to Drexel his 
"note" for $1,100, and Drexel gives to Morgan his 
" check " for $1,000. Morgan takes the check to the bank 
and presents it, and the cashier transfers $1,000 from the 
credit account of Drexel to the account of Morgan. That 
is his capital. This credit account is the "fund" with 
which his business is begun. 

Morgan now goes, to Chicago, where he has the credit 
account transferred to a bank. He rents and equips an office. 
He forms business relations with an old and reliable produce 
broker who has a seat on the Board of Trade, and agrees 
to divide commissions with him until, finally, he is able to 
purchase a seat of his own. He devotes himself to build- 
ing up and enlarging his clientage. By adver- 
^'InUundT' ti^ement and constant effort he gains prestige ; 
he arranges with the bank to carry the margins 
of speculating clients ; he finds constantly increasing profits 
in his commissions. A business which at first netted him 
only enough to meet office and personal expenses, after 
years of effort nets him $10,000 per month. During this 
time he has paid the original loan from Drexel, bought 
a seat on the produce brokers' board (the Board of Trade), 
and at a mature age becomes possessed of many valu- 
able properties and securities. All of this has come to 



32 WHAT ARE FUNDS? 

him from the use of credit, from untiring energy, from 
thrifty habits, and an unimpeached integrity. He now 
wishes to retire from the business of brokerage and to lead 
a more quiet hf e, devoting only such time to business affairs 
as may be necessary to the care of his investments. 

Gates, a young man of wealth, and a friend of Morgan, 
desires to engage in the business of brokerage. He does not 
wish to spend a life of hard competitive effort in building up 
a new business ; he prefers to buy a business already estab- 
lished. He goes to Morgan for advice, and each recogniz- 
ing an opportunity, a bargain is made, whereby Gates agrees 
to pay $50,000 for Morgan's seat on the Board, and $250,000 
for the business name of his firm. That is, Morgan retains 
all the securities, accounts, and investments ac- 

A credit quired by him in course of business : he sells his 
purchase. /i . . Vi 

seat (his opportunity to trade on the Board) and 

his "good will" (or business reputation) for the sum of 
$300,000. But how is this to be paid for? Does Gates 
count out standard gold coins to that amount ? 'No. He 
does not even pass to Morgan his check. Finding that it 
will be advantageous to retain his present available "funds" 
for use in the business, it is arranged that the purchase shall 
be made " on credit " ; that is to say. Gates offers to Morgan 
three promissory notes for $100,000 each, due in one, two, 
and three years respectively. The purchase price of the 
business is $300,000, as agreed, but in consideration of 
the time that payment is deferred. Gates further promises 
to pay 5 per cent interest on the respective amounts until 
they are paid. By these several contracts (agreements for 
the purpose of exchange) Gates promises to deliver $115,000 
at the end of the first year, $110,000 at the end of the sec- 
ond year, and $105,000 at the end of the third year— $330,- 
000 in all, principal and interest — instead of $300,000, the 
purchase price if payment had been made in money at 
the time the business was delivered. Now note just what 
has taken place. Morgan has sold what ? Nothing tangi- 



CREDIT FUNDS 33 

ble ; nothing that may be seen ; nothing that may be passed 
from hand to hand. He has disposed of his business oppor- 
tunity and his business reputation as a broker — nothing else. 
Morgan may still do business in any other way so long as 
he does not attempt to use his seat on the Board or the 
name and reputation of his old firm for the business of 
brokerage. And what has he received ? Something tangi- 
ble ? Something that may be seen ? Something that may 
be passed from hand to hand ? Yes, but what is it ? Is it 
gold ? Is it money ? ]N"o. What is it ? " Pa;p6TP One 
slip reads as follows : 



1,000.00. New York, January i, 1901. 

One year after date, for value received, I promise to pay to Morgan 
or order One Hundred Thousand Dollars in gold coin of the United 
States, of present weight and fineness. With interest at the rate of 5 
per cent per annum from date until paid. 

[Signed] Gates. 

The other Irwo slips read exactly the same way, except as 
to date of payment. But suppose Morgan loses these 
slips of paper, or that they are destroyed by fire, is the 
credit destroyed ? ]^ot at all. The obligation to pay re- 
mains as before ; if Morgan can prove the loss and likewise 
the amount due, he can enforce the payment. These slips of 
paper are only evidence of the credit agreement, which in 
itself is a thing as intangible and as invisible as that for 
which it was given — viz., business opportunity and business 
reputation. Still, credit is bought and sold in the market; 
in fact, credit is one of the chief items of exchange in mer- 
cantile business. 

Essential Characteristics of Credit 

Good- will, membership in a society of brokers, business 
opportunity and reputation are the properties that have 
changed hands. They have not been given away. !None 
of them has been exchanged for another — they have not 



34 WHAT ARE FUNDS? 

been bartered, yet no money has passed. They have been 
bought and sold, full payment has been given and received, 
Credit ^^^ *^® ^^^ *^*^^ ^^^ passed. What represents 

arises out of the other side of the transaction ? As a result 
exchange. ^f ^]^g exchange there came into being, and still 
exist, Gates's notes for $330,000. All these promises have 
purchasing power, and so long as they exist they may serve 
again and again in any number of transactions until paid, 
or until their values are lost by depreciation. 

To understand the nature of credit it may be well to re- 
flect on the underlying principles of exchange. In the first 
place, why did Morgan and Gates trade ? Morgan had a 
business that was bringing him in a net profit of $10,000 
per month — $120,000 per year. This was its net income- 
producing power to him. Much of the return was due to 
continued personal effort, but the reputation of the firm was 
so well established that its clientage in large measure would 
be retained, though its management were changed. Mor- 
gan, however, wished to avoid the nervous 
vrincwles strain and the responsibilities of an active 
of exchange broker. In his judgment he would rather have 
?o crldit^ $300,000 in gold than the business which he has 
sold — i. e., he estimated or valued $300,000 more 
highly than the business. Gates, on the other hand, would 
rather have the business than $300,000 in gold ; each found 
the transaction to his advantage and $300,000 was agreed 
upon as the price. Here was a difference as to valuation but 
an agreement as to price, and the exchange took place as a 
result. 

l!^ow after the price has been agreed upon there follows 
another transaction. Instead of Gates delivering the $300,- 
000 in gold first agreed upon as the price, he offers to Morgan 
his three notes, each for $100,000, with interest — obliga- 
tions for the future delivery of money, amounting in all to 
$330,000 when due. Morgan accepts these in lieu of the 
$300,000 in gold. Why does Gates offer the notes, and 



CREDIT FUNDS 35 

why does Morgan accept them ? Gates offers them because 
he values $300,000 in gold more highly than the notes. 
Morgan accepts the notes because in his judgment they are 
Value quite as valuable as $300,000 in gold. Morgan 

and price indorses the notes and sells them for $305,000. 
of credit. Why does the purchaser offer, and Morgan ac- 
cept, that amount ? Manifestly, because the purchaser thinks 
the notes of greater value to himself than $305,000, while 
Morgan esteems the $305,000 more highly. The purchaser 
of the notes is an investor in commercial paper; he gets 
his income from furnishing current funds to those who 
wish to sell credit on terms of advantage to him. Morgan 
is also about to devote his energies to investment, but his 
judgment is that he will profit something by exchanging the 
notes for $305,000 in gold. But again, the purchaser of the 
notes, instead of paying Morgan $305,000 in gold, hands to 
him his check for that amount, which is accepted. It is quite 
clear that this was done because the one making the pur- 
chase thought it to his advantage, while Morgan valued 
the check quite as highly for the purpose of exchange as 
he did the gold. 

We now pass to the consideration of the basis of credit — 
i. e., the elements in it which cause credit funds to be val- 
Basis of the ^^^ more highly than money and consequently 
credit to supplant money exchange. Morgan's judg- 

judgment. ment is that the promise of Gates to pay 
$300,000 with interest at 5 per cent is more desirable than 
his own business as a broker. But why ? Before an ex- 
change can take place the conclusion must be reached ; but 
1 AUliiii to ^^ what process ? The thing to be considered is 
oMain money a contract for future delivery of money. The 
for future promise is that Gates will pay $330,000 in gold 
e iveiy: ^^ ^ definitely appointed time. In estimating 
the value of such promises, what element must be taken into 
account? In the first place, Morgan must estimate the ability 
of Gates to obtain that amount of gold at the time proposed. 



36 WHAT ARE FUNDS f 

He sells his business ; he receives a claim against the future 
income of Gates ; he must, in estimating the ability of Gates, 
therefore, consider his facilities for obtaining money. But 
this is not all. There is a second consideration. Morgan 
must not only pass judgment on Gates's ability, 
\uqrity^^ but he must also take into account Gates's dispo- 
sition to apply the money obtained to the fulfil- 
ment of his promise — to the payment of the claim when due. 
These two judgments lie at the basis of all credit ; on these 
two elements does the value of credit rest. (1) A judgment 
that the one promising is able to fulfil his promise. (2) A 
judgment that he will be willing. Willingness is another 
name for " honesty " or " integrity." If these two judgments 
are favorable, or, as the business man would put 
a favorable ^*j ^^ Morgan has "confidence" in the future 
judgment— delivery, he is in a position to make a business 

Confidence. j_- , x xi ^ i £ x' j. 

•^ estimate as to the jpresent value oi a future 

income of $330,000. Confidence is nothing more or less 
than the result of judgment that a person is both able and 
willing to do what he promises. 

That which we call security is a contract whereby a fa- 
vorable judgment is secured when otherwise such judg- 
ment would be lacking. In the transaction in 
ecwi y. -^liich Morgan sells Gates's notes, the purchaser 
of the notes was not well acquainted with Gates, and was not 
in a position to pass favorable judgment ; he did not value 
Gates's ability and integrity as highly as did Morgan. The 
purchaser of the notes, perhaps, would not oifer more than 
$250,000 for them, but he knew Morgan and had confidence 
that he would meet his credit obligations. He was willing 
to buy Morgan's contract for future delivery of $330,000, at 
the times specified in the notes from Gates to Morgan, for 
$305,000. He therefore proposes that he will pay $305,000 
for the notes, on condition that they be indorsed by Mor- 
gan. What was the force of this indorsement ? Why did 
the simple fact of Morgan's name written across the backs 



CREDIT FUNDS 37 

of the notes raise the purchaser's valuation to such an ex- 
tent that he was wilHng to add $55,000 to his offer ? By 
operation of commercial usage (law) the addition of Mor- 
gan's name set up a new contract. If this contract had 
been written out in full it would have been as follows : 

In case Gates does not pay this note when due, upon notice given 
to me, I hereby promise to pay it in full myself. 

[Signed] Morgan. 

This contract is one of the obligations known as personal 

security. IS'ow the purchaser has confidence that the sev- 

„ , ,. . eral amounts promised by Gates will be paid 
Relation of , . -^ . ^ , '^ , , ^ ^r 

security to at the time specified, and he olters Morgan 

credit. $305,000 for them. The effect of security is 

to obtain a more favorable estimate as to the value of the 

contracts for the future delivery of money which Morgan 

offered for sale ; it increased the price obtainable from the 

credit and decreased the cost of the money or other things 

received by Morgan in exchange for credit. 

Credit viewed as a " Short Sale " of Money 

]^o better illustration of a credit transaction may be 

found than what is known as a " short sale " — the sale of 

something that one does not possess. Pillsbury 

A short sale ^ q^ ^^^ millers. They enter into a contract 
or flour. "^ 

for the delivery of 10,000 barrels of *A* flour 

to Kimball & Co., of Liverpool, at any time that Kimball 
& Co. may want it, after May 1, at $8 per barrel. Their 
business manager has made a sale of something that they 
do not possess — something that they are " short " of. They 
have neither wheat nor flour. The company has only a 
mill and other equipment for making the kind of flour 
sold. The contract for future delivery, however, is im- 
portant to the successful management of the mill. By this, 
one factor in the manager's problem is solved — the price 



38 WHAT ARE FUNDS? 

which he will receive for his output. From business ex- 
perience he is able to calculate another factor with sub- 
stantial accuracy, viz., the cost of manufacture. If, there- 
fore, the manager can make a contract which will fix the 
cost of the wheat to be used in the manufacture of the 
flour, he can calculate the profits as well as if he had sold 
flour already produced. 

Wheat was selling at 99 cents per bushel at the time 
that the " short sale " of flour was made. If, the company's 
manager calculates, " No. 2 Hard Spring " wheat 
ofwheal^ ^ ^^J ^® ^^^ ^* ^^ P®^ bushel, his company will 
make a profit of $2 per barrel on the Liverpool 
contract. To assure his company of this, he enters into an- 
other contract with Brown & Schaffer, produce-brokers, for 
the future delivery of 50,000 bushels " Iso. 2 Hard Spring " 
wheat " on call " after thirty days, at $1 per bushel. But 
Brown & Schaffer have no wheat at the time the sale is made. 
They are "short" of the commodity contracted for, but, 
being a reliable business concern, Pillsbury & Co. make a 
part payment, or " put up a margin," and rely on Brown 
& Schaffer for the delivery of the grain. The manager can 
now devote himself to the manufacture of flour without 
being troubled about fluctuations in the price of wheat ; he 
has shifted the risk of market fluctuations in the price of 
wheat to Brown & Schaffer. Pillsbury & Co. have made a 
" short sale " of flour, and to cover the risk of fluctuating 
price they enter into a contract for the future delivery of 
wheat. 

Brown & Schaifer sold "short" of " ISTo. 2 Hard 
Spring " wheat at $1 per bushel for delivery on demand 

Settlement of ^^^^^ ^^^^^^ ^^J^' "^^^^ ^^^. *^'^^ because in 
the short sale their judgment wheat was " going down " ; they 
of wheat. wished to buy on a better market to fulfil their 
engagement with Pillsbury & Co. Instead of going down, 
however, a " corner " is formed in this grade of wheat and 
the price advances rapidly. Thirty days hence Pillsbury 



CREDIT FUNDS 39 

& Co, " call " for the delivery of 26,000 bushels. JSTothing 
will satisfy the contract under which the call is made but 
" 'No. 2 Hard Spring " ; this is the grade needed for the 
milling process for the production of the kind of flour sold 
to Kimball & Co. ; this is the only kind that will be re- 
ceived. Whatever the sacrifice to be made by Brown & 
Schaffor, there is for them no alternative other than to de- 
liver the exact thing promised, or to " settle " — i. e., to turn 
over to Pillsbury & Co. $12,500, to pay the difference be- 
tween the contract price and the market price, which on 
that day happens to be $1.50 per bushel. In other words, 
before Pillsbury & Co. will agree to "settle," Brown & 
Schaffer must place the mill company in a position to buy 
$1.50 wheat at a cost, to them, of only $1. 

The Pillsbury company, however, have not the extra 
$25,000 with which to pay for the wheat needed. The 
manager therefore takes the $12,500 received from Brown 
& Schaffer and goes to Armour & Co., whose elevator 
bins are filled with " No. 2 Hard Spring," which they are 
holding at $1.50 per bushel ; he arranges to purchase 25,- 
000 bushels at $1.50, paying down $12,500 (the amount 
received from Brown & Schaffer), giving his firm's note 
for $25,000 (principal) and $500 (interest), due in ninety 

days in payment for the balance. The wheat 
tffionii/' is immediately dehvered. Pillsbury & Co. 

have purchased 25,000 bushels of the kind of 
wheat desired. They have become the absolute owners of 
it; they may grind it and dispose of it as they please. 
But how has the wheat been paid for ? In exchange, the 
company, in part consideration, has sold its contract for the 
delivery of $25,000 " on call " after ninety days ; it has 
made a " short sale " of money — has again promised to de- 
liver something that it was " short " of at the time the con- 
tract was made, hoping to obtain the money from Kimball 
& Co., of Liverpool, in return for the flour, before the 
maturity of the note. Thus, the calculation is, the return 



40 WHAT ARE FUNDS'? 

on the contract for the short sale of flour will cancel the 
contract for the short sale of money, and the Pillsbury 
company will have the difference between the two contracts 
as profit. 

The same rules, identically, apply to the credit contract 
of short sale of money as applied to the short sales of flour 
and of wheat. ISTothing will satisfy the credit contract but 
the delivery of the thing promised. Pillsbury 's manager 
makes a similar contract on the purchase of the 
fumm/thf remaining 25,000 bushels of wheat due from 
same as in Brown & Schaffer ; he grinds his flour and de- 
sale of illieat. ^i^^rs it to the Liverpool merchants in time to 
meet the short sale of flour to them. But Kim- 
ball & Co. fail to make return in money on the shipment ; 
after the delivery of the flour Kimball & Co. become bank- 
rupt. Nevertheless Pillsbury & Co. must meet their " short 
sale " of money— their two notes for $25,000 each to Armour 
& Co. on demand after ninety days. This must be done even 
though it requires the sacrifice of working capital, credit 
accounts, treasury securities, even the milling plant and 
business reputation of the company. All must be sold, if 
need be, to procure the money for delivery under the con- 
tracts to Armour. Nothing but money will satisfy the con- 
tracts. If the notes be for the delivery of "gold coin of the 
United States, of present weight and fineness," then gold 
coin of this description must be delivered, or a " settlement " 
made — a new contract entered into for the delivery of some- 
thing else which Armour & Co. will take in lieu of gold. 
Greenbacks may be offered instead, and accepted ; Pills- 
bury's check may be taken as readily, if Armour believes 
he can get the amount of gold contracted for in exchange 
for the check. If Pillsbury & Co. can not get greenbacks, 
or if they have not a bank account, then they may offer to 
Armour some real estate in St. Paul, and this may be taken 
" in settlement " of the short sale. On the other hand, un- 
less something else will be taken " in settlement " by Ar- 



CREDIT FUNDS 41 

mour & Co., there is no alternative. Pillsbury must get 
the gold or be declared bankrupt. 

In a period of great financial distress — in other words, at 
a time when demands for delivery of money on credit con- 
tracts are large — the price of money may ho, forced up ; all 
kinds of property may command a low price in exchange 
for money. As in case of the corner on wheat, those who 

have sold " short " of money may have to pay any 
A corner on . x i.^ • li. iV- \ ± j 

money— Fi- pnce necessary to obtain the thing contracted 

nancial dis- f or, or for such other " funds " as will be received 
in place of money by way of "settlement." 
"When demand is made for payment, money may cost two 
or three times as much as at the time the contract for fu- 
ture delivery is entered into. Failure to meet these con- 
tracts means bankruptcy — the sacrifice of all forms of 
property on the altar of "short sales" in credit. Bank- 
ruptcy is, in effect, a means of judicial "settlement" of short 
sales of money in cases where the parties to the contract 
can not come to a new agreement or " settlement " among 
themselves. 

Financial Uses of Credit 

In its relation to finance, credit has two uses : (1) It may 
be used as a means of obtaining funds. (2) It may itself be 
used as " funds." The second use is the subject of present 
consideration. Yery often it happens that a merchant will 
take his note to the bank for discount. In this case the 
transaction is one of exchanging a form of credit created 
for the purpose of obtaining "funds" (a note) for another 
form of credit which is created for the purpose of being 
used as " funds " (a bank account). 

Forms of Credit used as " Funds " — Bank Credit 

Bank credit is a form of contract for the future delivery 
of money, especially created to serve the business commu- 



42 



WHAT ARE FUNDS? 



nitj as " current funds." The capital of the bank is in the 
form of a " money fund." This stock of money is held in 
reserve — is used to support its credit. The whole equip- 
ment of a bank is directed toward this end, and its success 
or failure depends on maintaining its credit currency. The 
obhgation of the bank is to pay money on demand. It 
must always keep in stock a "money fund " sufficient to 
meet the demands of creditors for delivery of money under 
these contracts. The larger its money fund the greater 
the amount of credit currency it can safely sell to its cus- 
tomers. About 50 per cent of the funds of a well-organized 
business community are in the form of bank credit ; about 
90 per cent of the exchanges of such a community are made 
for bank credit in one form or another. 

There are several forms of contracts for the delivery of 
money which are sold by a bank for use in a community 
as funds. One of the most common is the " bank-note." 
The bank-note is a written promise of the bank to deliver 
or " pay " the amount of money named on its face to the 
one presenting it at its counter. The following 
is a photo-copy of a ten-dollar-note issued by 
the first Bank of the United States in 1796. This form of 
note is known as a " Willing ISTote," taking its name from 



Bank-notes. 




Mr. Thomas Willing, the president of the bank. The second 
reproduction is known as a " Biddle I^ote." It was issued 



CREDIT FUNDS 



43 



by the second Bank of the United States in 1829. In most 
countries bank-notes may be issued only in conformity with 





1^- 




certain legal regulations and under such guarantees of 
government as to cause them to pass from hand to hand as 
" money." Until about the middle of the last century this 
was the most usual form of " bank credit " used by busi- 
ness men. In exchange for notes, bills, accounts, etc., 
offered to the bank for sale by customers, it would give 




out its own notes. At the present time, however, the most 
common form of bank credit is the bank-account — a credit 
fund represented on the books against which the person 
owning it may draw checks in any amount desired. The 
" notes " of the bank are purchased by its customers, be- 
cause they may be passed from hand to hand in the com- 
munity as current funds. They are considered as good as 



M 



WHAT ARE FUNDS? 



money because the community believes the bank issuing 
them to be so conducted that it can at all times deliver the 
money contracted for if demand be made, and, being more 




convenient to carry about than gold and silver, the notes 
are preferred. The bank-account adds to this convenience 
that of allowing the business man to draw^ for the exact 
amount needed. In the early half of the last century there 
were many abuses of public confidence on the part of banks. 
Each State had its own peculiar laws, and many projects 
were devised which flooded the country with bank-notes 
that proved worthless. This caused the Federal Govern- 








ment to pass stringent laws regulating issues and deposits. 
In the United States, at present, " national banks " alone 
issue notes. These notes are also called " circulation." 



CREDIT FUNDS 45 

A bank-credit " account," sometimes called a deposit, is 
in reality not a deposit in any sense of the word. The cus- 
Bmk- tomer of the bank takes to it money and 

accounts— " checks " (or other promises and orders to pay 
Deposits. money) which are owned by him and sells 
them; he exchanges these for an "open account" at the 
bank. The customer desires a credit p^ the bank because 
it will serve him better than any other form of current 
funds. The exchange takes place by reason of the fact 
that each gains a business advantage by so doing. The 
bank can use the money and checks purchased (" deposited ") 
to greater advantage than can the customer, while the cus- 
tomer can use the current credit of the bank to better pur- 
pose in his business than can the bank itself. 

It sometimes happens that the banks are reduced to a 
condition in which their money reserves are threatened, 
and with this their contracts for delivery of money — i. e., 
their outstanding credit. Various temporary expedients 
are at such times resorted to, such as the creation of credit 
instruments that will be received in " settlement " in lieu of 
money, but which are not contracts for the immediate pay- 
ment (or delivery) of money over the counters. 
f^rmcy!''^ For example, during the financial crisis of 1893 
the Marine Bank of Buffalo issued to its em- 
ployees a form of certified check for payment of wages and 
salaries; instead of giving them money in payment of 
credit accounts, they issued a new contract for future de- 
livery of money, which the owner or borrower could pass 
in the community, in settlement of his own credit obliga- 
tions, until the bank should be able to take up these checks 
without impairing its reserve. Likewise, the South Chatta- 
nooga Savings-Bank, not having money to deliver, on de- 
mand, to those wishing to withdraw, in August of that 
year issued a new contract for the delivery of "current 
funds " four months hence, a copy of which is given on page 
46. This form of currency temporarily answered as funds to 



46 WHAT ARE FUNDS? 

those receiving it, and the certificates were taken in " settle- 
ment " of the contract of the bank entered into at the time 



THIS IS TO CERTIFY, THAT THERE HAS BEEN DEPOSITED IN THIS BANK FIVE DOLLARS, PAYABLE TO THE 
BEARER OF THIS CERTIFICATE, IN CURRENT FUNDS FOUR MONTHS FKOM DATE. 

CHATTANOOGA, TENN. AUG. 19, 1893. SOUTH CHATTANOOGA SAVINGS BANK. 



By. 



THIS CERTIFICATE WILL BE RECEIVED ON DEPOSITrfJ ^_ NT OF ANY DEBT OR OBLIGATION TO T 



*5*- 



FIRST NATIONAL BANK, )}^ T^ (^CITIZENS BANK & TRUST CO., 
THIRD NATIONAL BANK, *C^« .(^WIEHL, PROBASCO & CO., 
CHATTANOOGA NATIONAL BANK *^'$^^* CHATTANOOGA SAVINGS BANK, 
SOUTH CHATTANOOGA SAVINGS BANK. 

This certificate is secured by the deposit of approved securities in the hands of t. G. MONTAGUE, 

PRESIDENT FIRST NATIONAL BANK, AS CUSTODIAN TO DOUBLE THE AMOUNT ALL SUCH CERTIFICATES. 



manager, 
chattanooga clearing house association. 



the deposit was made. During the financial strain or "panic" 
in 1893, the enforcement of contracts for delivery of money 
would have caused the banks of ^N'ew York to sacrifice their 
entire assets to obtain the gold or other forms of " cm-rent 
funds." They had sold to their customers " demand cred- 



No. 0000 $20,000. 

Loan Committee ol the New York Clearing House Association. 

JVew York, 180.'^. 



This Certifies, that the_ 



has deposited ivith this Committee, seairities in accordance with the rrocenl- 
ings of a Meeting of the Association, kelr' .lin>e 15th, 1893, I'pon wJiich t^.is 
Certificate is issued. This Certificate vn^l h"- rfcei'>^ed in vavmento-^ J^^^r,„^-.<, 
at the Clearing House for the sum of TWENTY THOUSAND DOLLARS, 
from any Member of the Clearing House Association. 

On (lie surrender of this Certificate by the : j 

depositing Rank above named, the Commit I O 

(ee will endorse the amount as a paymert on j 2 

the oblisation of said Rank, held by them, ; , ^ 

and surrender a proportionate share of the i ^ 

collateral securities held therefor. i d: 



$20,000, 



its," "short-time" current funds with which to meet them. 
To tide over this emergency, clearing-house certificates were 
agreed upon, to be taken in settlement between each of the 
clearing-house banks. Since they could use certificates of 
indebtedness of the Clearing-House, collaterally secured by 



CREDIT FUNDS 



47 



assets of the bank, this form of credit funds avoided the 
necessity of selling the assets to obtain gold for payment. 





T\ieP¥esi4c\\t atvd Managers 

of the 

promise to pay the bearer, on demand, at the Office 
of their Treasurei-, in bills current in Eennsyhania, 

Wilkesbarre, March 1st 1816. 




Merchants and manufacturers may resort to the same 
kind of expedients during periods of financial stress as that 
above described with reference to issues by banks. They 
may "settle" their wages-accounts by means of "scrip," 
Emerqencv ^^ ^* ^® called — i. e., pay a credit contract which 
funds— Com- is due with another contract for delivery of 
mercial. money or goods at a definite future time ; and 

the various merchants or business men of the community, 
believing that the one issuing the " scrip " will be able 









//y //V 






to meet it after the financial strain is past, are willing to 
take it in payment for goods and the scrip passes current. 
Every period of financial strain or business depression 
since the Revolutionary War had its scrip issues. After 



48 



WHAT ARE FUNDS? 



the War of 1812 there was great financial distress, during 
which time the country was virtually without metallic cur- 







^n ^oii/<> oi LXUtcni -Oann ^-^ou> 



Port Deposit, July ^^ 



0^.V^T?^^^u^'^yM^-^.^y^^^^ j^a^^ 



rency. To meet this emergency business houses and con- 
cerns of every kind issued " shinplasters," as they were 
called. The first here exhibited is from an issue of the Old 
Easton & Wilkes Barre Turnpike Company. From 1837- 
'41 the issues of private concerns were almost the only 
currency in use. The scrip of the Camden & Woodbury 



asifttSi 








Transportation Company and that of the Chesapeake & 
Ohio Canal Company are good illustrations of the form of 
funds in current use by transportation concerns of the time. 
The demand for " change " at this time finds illustration in 
the issues of the Marion Change Association of Marion, 
Ala. Being without money or means of carrying on 
transactions with their customers, the leading business men 



CREDIT FUNDS 



49 



of the place, whose names appear at the top of the bill, 
organized for miitaal accommodation. Certificates of de- 




posits of savings-banks were also put into use as money in 
denominations to suit the convenience of customers. An- 



JohnH»rt.ir,i U ,,1 .y; Jjip ,Hi . h, ^ t 








u-^^^slVV^ 



SSE]AT]D}!l 



Wilt pnj'lic liuir.r, TweUc and a Half t-enU, attlte 

coutUer of either member of the Axsocimion, or at l/ie Office of 

Mobile, in Slate Bank jYolet 
the amount of Fite Dollars in presenJed. 

Marion, Alabama^ js:} 




Treas 



Pns H. 



other form of currency is what is known as a dividend war- 
rant. It is intended to serve as funds without putting the 














YAr 



wimSi^!^3S!%'mirjsrw's.':^j^s:i'^^^^ 



si 



60 



WHAT ARE FUNDS? 




concern to the ne- 
cessity of raising 
funds to pay divi- 
dends. Generally 
speaking, it is a 
dangerous expe- 
dient, and indi- 
cates financial 
weakness in the 
company using 
it. The dividend 
warrant is some- 
times used as a 
means of making 
sales of property 
which a company 
may have on the 
market. The div- 
idend or income 
warrant here ex- 
hibited is of this 
sort. 

Yarious depart- 
ments of the Grov- 
ernment may at 

PuUic t™^^ 

emergency find 
currency. ^^^^_ 

selves under tem- 
porary financial 
disabihty — may 
not be able to 
meet outstanding 
credit demands or 
procure funds for 
necessary pur- 



CREDIT FUNDS 



51 



chases. Instead of making the sacrifices necessary to pro- 
cure gold or other current funds demanded, new contracts 
for the future delivery of money may be sold or exchanged 
for old ones already matured. A copy of a certificate of 
indebtedness or obligation of the town of Fayetteville, Ark., 
as issued in 1842, is here exhibited. J^early all the States 




and local divisions of States were at that time bankrupt 
from having undertaken public improvements in the form 
of canals, railroads, and turnpikes. These notes were paid 
out to officers and others having credit claims against the 
towns, and were circulated in the community in the same 
way as are national bank-notes to-day. The scrip of the 
town of Port Deposit issued during the depression of 1857, 
and that issued by the same town in 1862, when the levies 
of war had depleted local funds, are good examples of the 
emergency currency issued by towns at a later time. After 
the catastrophe at Johnstown, Pa., a similar financial method 
was resorted to. Bond certificates in convenient denomina- 
tions, to the amount of $20,000, were put into circulation 
as a means of meeting current necessity. In 1893 the city 
of Pichmond issued a 6-per-cent bond certificate of similar 
character. The " warrants " of counties and school districts 
find like employment. The one- and two-year "interest 
notes " issued by the National Government during the 
civil war were " emergency currency " for the use of the 
Federal G-overnment. They were contracts for the delivery 



52 



WHAT ARE FUNDS? 



of money one or two years from date given, in settlement 
for credit claims due, and on which demand for payment 




had been made. The United States note or " greenback " 
was originally a species of emergency currency in the nature 
of a contract for the delivery of gold or silver coin "on de- 
mand." It was understood, however, at the time of issue, 
that the demand would not be met until the Government 
had the necessary gold and silver in the Treasury with which 
to meet it. The result was that the notes did not pass " at 




par " with gold or silver, but were received at a discount 
proportionate to the estimates of value based upon them by 
those receiving these promises. 

Commercial Credit Funds 

Commercial credit or contracts for the future delivery 
of money are frequently given and received in transactions 



CREDIT FUNDS 63 

with merchants, as between those using them they answer 
every purpose as "funds." The practise allows merchants 
to make sales and customers to make purchases. Under 
such credit arrangements a customer may order goods of a 
house " on credit " and make " settlement " for the credit 
at a future time. The promise to pay is unwritten; it 
may be made by tacit understanding. Some memorandum of 
the transaction is usually taken at the time, although it may 
be left entirely to the memory of the parties without any 
form of entry. A large part of the mercantile business of 
the country is conducted in this way. When one opens an 
account at a store he may make definite arrangements to 
have all purchases " charged " — that is, entered on the books 
— statements to be made and settled on the first of each 
month. When the customer is well known, however, and 
his abihty to pay is undoubted by the merchant, he may 
order goods without any previous arrangement. In this 
case it will be tacitly understood that the purchaser of 
goods will pay the account when demand is made. One 
may go to a grocer and say, " Please send out a barrel of 
Xo. 2 Pearl flour." The merchant will deliver the flour 
and charge the price to purchaser's account on his books. 
The contract for payment is just as well understood as if a 
definite formal arrangement had been made. A manu- 
facturer usually has many such arrangements with laborers, 
material men, and business houses with which he deals. So 
a retail merchant will deal on similar funding arrangements 
with wholesalers, and wholesalers with producers. This 
form of credit is not transferable except by special agree- 
ment, and can not pass current in the community. It 
answers as funds only to the one with whom the contract 
for future delivery is made. 

In all lines of mercantile business "the books "will 
show a large number of current credits — that is, the regular 
customers will have an understanding that all orders will 
be honored to a certain amount, settlements to be made at 



54 WHAT ARE FUNDS? 

stated intervals. The goods purchased in this way become 
the property of purchasers as absolutely as if money had 

been paid for them. Goods are exchanged for 
credits credit on open account. The merchant has a 

right to enforce the collection of the claim in 
the same manner as if a promissory note had been given. 

It often happens that two merchants, or a manufacturer 
and a merchant, may each wish to run an account with the 

other. In this case each will make entry of 
^IdiT^ goods purchased, and at the end of the month 

or year settlement will be made by exchange of 
statements of account and the payment of the balance due. 



CHAPTEE lY 
INSTRUMENTS OF TRANSFER OF CREDIT FUNDS 

Every purchase and sale involves an exchange in pos- 
session and ownership. Money funds when used in ex- 
change are passed from hand to hand. Many forms of 
credit funds, however, do not admit this method of trans- 
fer. For the purpose of making transfer of credit funds, 
several classes of instruments have come into vogue, each 
adapted to some special use or to the transfer of some special 
form of credit funds. 

The most common form of instrument used for the 

transfer of credit funds is the " customer's check." A 

$10,000 credit account is purchased at a bank 

The custom- ^ - j? .i j; i • 

er's check. ^J ^ customer lor the purpose oi makmg cur- 
rent purchases and payments. He then buys a 
stock of goods for $1,000. In exchange for the goods the 
customer of the bank transfers $1,000 of his credit account 
to the one from whom the goods were purchased. To do 
this he draws his check for the amount. 

A " customer's check " is a sight draft on a bank for the 
payment of the amount of money stated therein, to a third 
•person, " on account " of the maker. It differs 
significance from ordinary commercial drafts in that it is 
of a ''custom- drawn against an account purchased of a banker 
er's check." x xi. i? j • ' j. •± 

lor the very purpose oi drawmg agamst it ; 
the bank is therefore bound to honor the check when 
presented. The check need not be in any prescribed form ; 
it may be written on a blank sheet of paper, with a 

55 



56 WHAT ARE FUNDS? 

pencil or entered on the printed forms of a bank. It is 
for the sake of convenience and uniformity that banks 
provide blank checks for the customers. These blanks 
are usually bound and given out to the regular customers 
of the bank in book form. Each check usually has a 
" stub," or short end, which is left in this book after the 



Pulaski City.Va 190 No. 




or PULASKI CITV.VA. 

^ TO THE . 
fr ORDER OF $ 



_B0LLARS 



HQd/rtntfkmf-i 



check itself has been torn out, on which memoranda may 
be entered for the convenience of the customer — it assists 
him in keeping a record of the transfers made by him, and 
of the amount of such credit fund still remaining at the 
bank against which checks may be drawn. 

As before stated, no particular form is necessary, and a 
lead-pencil will serve as well as ink. The hona-fide inten- 
tion of the one owning the fund or account is 
out a all that it is necessary for the bank to know. 

'^ customer's ^^^ certain rules should be followed as a matter 
of convenience to the bank and precaution to 
the drawer. In writing and signing checks good black ink 
should be used. 

Checks should be dated, but the absence of the date 
does not warrant a bank refusing to cash them. While a 
note executed on Sunday is not good in many 
^hech^ jurisdictions, a check so dated is valid. A post- 

dated check does not make the bank liable for 
payment if presented before the date entered. Checks 
should never be issued imder an arrangement with the 
holders that they will not present them till a subsequent 



INSTRUMENTS OF TRANSFER 5Y 

date, inserted on the face of the instrument, as such prac- 
tise often leads to complications of business relations which 
wreck the credit of the maker and put the bank to endless 
trouble. 

A check may be drawn for any amount, so long as it 

does not exceed the " credit fund " of the one drawing. In 

the office of the Pacific Mills, Boston, may be 

Filh7ig m ^^^^ ^j^^ canceled check of the United States 

the amount. n r- i -r. i ^ -rx 

for 07ie cent ; on the walls oi the JBank oi Com- 
merce, ISTew York, is a check for $14,000,000, signed by 
the banking-house of Kidder, Peabody & Co. In this ap- 
pears one of the great economies of the use of bank credit. 
It is just as easy to transfer $14,000,000 in form of credit 
funds at the bank as it is to transfer one cent. In writing 
in the amount, the drawer should begin at the extreme left 
of the line. The illustration here given is a copy of a check 
drawn by Andrew Jackson on the second Bank of the 
United States, for one dollar. It is an excellent example of 
a poorly written check, and one which could be very easily 



|N>:i •^''^' Philadelphia, y&-^:^ ■^^_ tgJ/' 

ill BANK OF THE ,^^^^fe^ UNITED STATES, 
|i|| PAY to m4^^^^ ^^^^.^/^^.^^^ja, orBcart.', 






U^r^-T^ — — '■ — ~ Dollars 



" raised." One receiving such a check might write " one 
hundred " before the word " one," and " 10 " before the 
figure " 1," and in this way raise the check from $1 to 
$101. If this were done, and the bank cashed the check, 
the bank would not be responsible for the loss. The drawer 
would be held responsible for his own carelessness. This 



58 WHAT ARE FUNDS? 

method of raisiog checks is the one most common in bank- 
ing experience. It is wise to begin the writing at the left- 
hand margin, or draw a running line ^..^^^.^^^^^^^^^^...^^.^.^^ 
before as well as after the written words, thus preventing 
any additional writing. The check here exhibited, drawn 
by Daniel Webster on the Boston branch of the Bank of 
the United States, is a carefully drawn instrument. When 




Office of Discount and Deposit of the Bank of the United States. 

BOSTON, ■-■^'SO.Zf' 18 Z-^ 

- — ot 23e«itn% 

' "' Dollars x^- 



checks in which the figures in the margin do not correspond 
with the amounts stated in the body of the checks are pre- 
sented to banks for payment, the courts have decided that 
the amount stated in writing shall be considered correct. 
The usual practise, however, is for the paying teller to 
withhold payment until he may satisfy himself as to the 
intention of the maker of the check. 

It is not necessary to enter the name of the one to whom 
the credit funds are to be transferred. If a check is drawn 
Entering the " ^^J ^^ Bearer," any person that is the bearer 
name of the can collect it and no name need be inserted. 
payee, rj^j^^ name of a definite payee may be inserted, 

as, for example, " Pay to Leonidas Smith." Usually, how- 
ever, checks are drawn to some person " or order." The 
phrase '' Pay to the order of Leonidas Smith " signifies that 
the amount is to be transferred or delivered to Leonidas 
Smith, or to any person to whom he order's it paid. 

It is customary to number checks consecutively in the 
check-book so that each one can be accounted for. The 
numbers are inserted for the convenience of the custom- 



INSTRUMENTS OF TRANSFER 59 

er, and not for the convenience of the bank. The 
checks (or " vouchers," as they are called after thej have 
Checks ^^^^ paid) when returned may thus easily be 

should he compared with the " stubs " of the check-book, 

easy reference. 

A check-book is a bound collection of blank orders for 
the transfer of bank credit. The advantage of binding is that 
the " stubs " may be kept for reference. By ref - 
'' check-hooU:' ei'ence to the memoranda so kept the customer 
may at any time know what amount of funds re- 
main subject to draft. The " bank-book " or transcript of 
deposits shows the other side of the customer's accounts. 
At the end of each month this is left at the bank that the 
amounts drawn may be entered and a balance struck. If 
the bookkeeper's balance is different from the customer's, 
this may be accounted for by checks drawn but not pre- 
sented for payment. There being no mistake, the book- 
keeper's balance, less checks outstanding, will equal the 
balance appearing on the stubs of the check-book. The 
unpaid checks may be presented at any time ; therefore 
the available balance of account is the amount shown by 
the " check-book." After the " bank-book " has been bal- 
anced, the paid checks are returned as ^' vouchers." 

If one wishes to draw money on his own account the 
check should be written " Pay to the order of CasliP This 
Drawina ^® preferable to a check drawn to " Bearer." A 
check to check drawn to " Cash " will not be paid to 

oneself. ^^^ ^^^ ^^^^ ^j^^ drawer or his well-known 

representative, while a check payable to bearer, if lost, 
might be misused. A check written "Pay to the order 
of ... . [your own name] . . . ," will necessitate an indorse- 
ment — i. e., one drawing to himself would be required to 
indorse his own check before he could get it cashed. 

One wishing to draw a check to pay a note may make 
it payable " To the order of Bills Pay able. "^^ One buying 



60 WHAT AEE FUNDS? 

a draft may indicate this in proper language, as " Pay to 
the order of iT. Y. Draft and Exchange.^^ Any special 

^, , , personal use may be indicated on the face of 

Checks drawn \ . *^ 

to oneself the instrument. 

for special Likewise, a check drawn to another may have 

purposes. ' <• i p i n ^ - t 

the purpose or use oi the lunds transierred indi- 
cated on its face ; as, for example, " Pay to the order of John 
Jones, for September rent." When the check has been re- 
Checksdrawn ^^^^^^^ indorsed by John Jones and paid by 
to others for the bank, it will answer the double purpose of 

special "voucher" from the bank and of receipt of 

purposes. ^ 

payment of " September rent." A settlement 

of wages may be made by check, marked " Pay Koli " or 

"Wages." When objection is made to this, it is best 

WHCN COUNTERSIGNED BY J"H-W[LHELM PAy^STER 



always to conform to the wishes of the bank — it is an un- 
necessary encumbrance of the paper which is intended to 
represent relations between customer and bank only. The 
transactions between Jones and the bank's customer may 
be represented in some other way. A bank will make 
no objection to the matter on the face of a check if 
it is printed or engraved, and has not to be written 
or inserted at the time it is drawn. The above form 
states the object for which the transfer is made. The 
large corporations of to-day have checks especially 
printed for nearly every account against which drafts are 
made. Other forms, quite as unobjectionable and more 



INSTRUMENTS OF TRANSFER 



61 



simple in style, have the purposes of their issue printed in 
red ink across the face, or engraved in some form. 




fertofenj 


m 


r 


rr\ 


- 


J 


1 — 1 


1 " 

H 
1 


\ 






^%^ 


-l^M^ 



Many safety devices have been used to prevent the fraud.- 
ulent alteration of checks. A customer may have an en- 
Safetu graved check-form of his own, and will notify 

devices, in his bank that it may honor those only which 
^ ^^ ^* are drawn on this prescribed form. But even 

then the prescribed blanks may get into the hands of those 
who would use them for purposes of fraud. As a means of 
preventing alteration and forgery, the amount may be 
punched or cut out of the paper. This safety device has 
been circumvented by having the holes filled with paper 
pulp and new figures cut or punched to suit the purposes 
of swindlers. Some companies have their checks limited on 




/<)// ^ 



i _ i ; :2 - I i . 1 £ C/ ^My>.i 






their faces. The best device yet adopted, however, to prevent 
" raising " is that employed by the express companies and the 
Post-Office Department. These will be explained later. 



62 WHAT ARE FUNDS? 

A novel instrument, used by the banks to save their cus- 
tomers the expense of paying the stamp tax imposed by the 
Government to help defray the cost of the Spanish- Ameri- 
can War, is given below. It is in form a receipt for funds 

transferred or withdrawn. The internal revenue 
aschecks!^^ law provided for a minimum tax of two cents 

on each check. Instead of presenting a check, 
the customer would sign a receipt, and the bank would there- 
upon make the payments or deliver the funds for which the 



i^U^iW^ /7ltu4. 




fi^tJLy*. 34tMxfbjJL >Wtef ^^H^ tc^ "^c 



aee^unt" 






SJL 



receipt was drawn. This was in general use in many parts 
of the country for direct dealings of customers with banks. 
It is sometimes a convenience in business to give to 
some one else the power to check against one's bank-ac- 
How to count. This may be done by giving to another 

authorize 2^ power of attorney — i. e., the right or author- 
draw on one's ity to be your attorney, to represent you in the 
account. transfer of funds On your account at a bank. 

Authority of this kind must be in writing, unless the bank 
is willing to take the responsibility for oral authorization. 
Financial houses, as well as the United States Post- Office, 
issue printed blanks for use by those who wish to give to 
others the power to draw on their accounts or to sign 
money-orders. A power of attorney from Daniel Web- 
ster to Mrs. Webster, giving her authority to draw and sign 
checks, is represented opposite. This was first reproduced in 
Rhodes's Journal of Banking ; it was taken from the files 
of the bank where it was used by Mrs. Webster. 



INSTRUMENTS OF TRANSFER 63 

The " crossed check " is a form of customer's check not 
commonly fomid in America. In England, however, it is 
in common use. It is an ordinary customer's 



cTec^ "'*'''''' check that has across its face bars which signify 

that it must be presented for payment through 

some other banker. Such a check will not be cashed if 

presented by the payee himself to the bank against which 









^^du^f^>^ 



it is drawn. The object of such a check is to have it first 
presented to a bank to whom the payee is known, and 



64 WHAT ARE FUNDS? 

whose indorsement will be accepted as a guarantee of the 
credit of the maker. When a check is crossed " in blank " 
— that is, has two lines drawn across its face with " & Co. " 
inserted — it may be presented for payment to any bank 



')/r^/A^,2^^/.r :yp/r,y,////u.r. \.M^<^ ^^^ "^/.^/'jz 



. /f/// /r//// /■'f/rr'/^ ^^ 



/-//. ^ 




other than the one on which it is drawn ; bnt when it is 
" specialized " — i. e., when it is crossed or has stamped across 
it the name of a particular bank— it must first be presented 
to that bank for payment. A law has been enacted in 
England which prohibits the payment of a crossed check by 
a bank against which it is drawn until it has been presented 
through another bank. If the drawer of a check knows 
the payee's bank he will usually " specialize " it ; if his 
bank is unknown, the check is crossed " in blank," and the 
bank paying it is held for proper indorsement. The 
" crossed check " is a more secure form of negotiable in- 
strument than the ordinary " customer's check." It is use- 
less in the hands of the wrong person. We have reached 
practically the same end in this country by having stamped 
on checks intended for circulation as negotiable paper the 
words, " Payable only through . . . Clearing-House when 
properly indorsed." 

The use of the " crossed check " has given rise to an 
institution known as a " cheque-bank." This form of bank 
sells to its customers a book of its checks, the amount for 



INSTEUMENTS OF TRANSFER 



65 



which each may be drawn being Hmited on the face of the 
check itself. For example : A book containing 50 blank 

checks, each of which may be drawn for the 
hankcliecJc niaximnm amount of $10, may be purchased 

for $500. When the book is finally presented 
at the bank for settlement, the bank will return to the cus- 
tomer the canceled and paid checks ; the difference between 
the amount of drafts actually made and the amount paid 
for the book will be returned to the customer, or credit will 
be given on the purchase of a new book. Check- books are 
made up of assorted blanks, to suit the customer's conve- 
nience. Such books may be had at the main office, or at any 
of the other banks which serve as correspondents of the 
" cheque-bank." 

The " customer's check " is the instrument usually em- 
ployed for the transfer of funds from one bank customer 

to another where business relations are such as 
ments of ^^ make them acceptable. It often happens, 

transfer of however, that a customer will find it desirable 
credit funds. , , ^ t ' iii i« ii 

to have funds m a bank where he is not known, 

or will desire to make payment to one who does not care to 

take the risk of a private check. In such case some other 

form of instrument of transfer will be used. 




For this purpose one of the most common devices is the 
" certified check." The customer will draw his check for 
the amount desired, and this will be handed to the cashier 



6Q WHAT ARE FUNDS? 

of the bank in which he has funds. The cashier will there- 
upon write across the face " Certified," or " Good when 
properly indorsed," over his official signature, and charge 
The " certi- the same against the customer's account. This 

fied check " amounts to a transfer to the bank of the amount 

and the 

" cashier's drawn, and a guarantee on the part of the bank 

check:' -ti^at the funds will be transferred to the owner 

of the check on presentation. Another form is the " cash- 
ier's check." To obtain a cashier's check the customer will 
exchange his own check for that of the cashier — i. e., the 





/-^^/•^.^y.^/-./ 



y ^/A,,:y 



amount of funds represented by the check will be formally 
turned over to the bank, and the bank, through its cashier, 
will thereupon deliver its own instrument of transfer to the 
customer, made payable to such person as the customer may 
direct. Another form of instrument of transfer of credit 
funds used between banks is the bank draft. One of the 
most artistic engravings of this kind is given on the oppo- 
site page — a form of draft used by the " Biddle Bank " for 
business with its correspondents. 

The money -order is an instrument of transfer of funds 
created for a special purpose. For example : One wishes 
to send $50 to a person residing in another part of the 
country. He will make a deposit, or in some manner cre- 
ate a $50 fund in the hands of a company or department 
of Government whose business it is to transfer fund^ The 
fund having been created, the company or department will 
issue an order for the amount, payable to the person speci- 



INSTRUMENTS OF TRANSFER 



67 



The letter 
of credit. 



fied. This will be sent instead of money or other forms 
of funds. Money-orders are issued by express companies, 
the Bankers' Money-Order Association, and the Post-Office. 
A photo-engraved copy 
of an Adams Express 
Company order is exhib- 
ited on page 68. 

One may wish to 
travel in a foreign land 
— let us assume the esti- 
mated cost to be $1,000. 
It may not 
be conve- 
nient or safe 
to carry money enough 
to pay the expenses of 
the entire trip. For this 
reason some form of 
credit is preferable to 
money. With this in 
view, the prospective 
traveler goes to his bank- 
er. He arranges at the 
bank for a special credit 
fund of $1,000 to be 
drawn against at any 
time. But banks and 
business houses abroad 
will not accept a "cus- 
tomer's check" against 
an American bank. A 
'^Letter of Credit" is 
therefore issued. The 
ordinary letter of credit is really a guarantee of payment of 
all " customer's checks " or drafts drawn by the holder to 
the amount stated in the letter. It is a " certified -account " 
6 




68 WHAT ARE FUNDS? 

instead of a " certified-check." It has its advantages over 
a certified -check in that it allows the customer to draw just 
the amount needed at anj time or place, and, upon identi- 
fication, to have his check cashed in the same manner as a 
certified -check or a cashier's check. With the increase of 
foreign travel the letter of credit has become such a com- 
mon instrument for the transfer of credit funds that every 
one should be familiar with its form and purpose. "We 
reproduce on pages 69 and 70 a facsimile of the first and 
second pages of a letter of credit for £100 ($500). ' The first 
page is the letter guaranteeing the account, authorizing the 
various correspondents of the bank issuing it, or any other 



J rmtvouAKs 
mtmBtg 







o Ji^esuiT^of 



i4rty erasure aHertUion or tti^ttlatum af^Jiis Order renders U MlW^jS-". 






banker to whom the letter may be presented, to pay to the 
holder any amount for which he may draw not to exceed the 
fund provided. In order that the fund may not be over- 
drawn, a second page is provided upon which are entered 
the amounts drawn. These entries are made by the bank 
ofiicer himself at the time that the draft is paid, and give a 
complete account of the fund. The entries give the names 
of the banks to which the letter is presented, the place, and 
the amount paid by each. On the third page is the " Indica- 
tion List" — i.e., the names of the bank's correspondents 
where drafts will be honored. The customer is not, in fact, 
limited to the correspondents of the bank issuing the letter, 
as the draft will be accepted at any place where the bank 



INSTRUMENTS OF TRANSFER 



69 



of issue will be given credit. As a matter of safety and of 
greater ease in identification, the banker issuing the letter 
requires the one to whom it is issued to place his signature 
on the face of the letter itself. He also takes a number of 











i $ -^^-^ -' ^>/ //>.///„ y,,JA A .>„,.„./ r), 










w^s^^^^^^mw^^^l^- 



other signatures on blanks specially prepared for that pur- 
pose, and sends one to each of the leading foreign bankers 
drawn upon. In course of travel or business the holder 
presents his letter at one of the banks named on the " Indi- 



70 



WHAT ARE FUNDS! 



cation List " ; thereupon the cashier will ask him, in his 
presence, to sign a draft for the amount desired. After 




„ m. I9C8PAI0 BY MORGAN, llftRJES & C^ PARIS 

I 's HAY.fi^ mm, m?La & ck lo«ooh» 












'^ 



comparing the signatures, the cashier will enter the amount 
of the draft on the second page of the letter, and return the 
letter with the money drawn to the payee. Payment is 
usually made upon the simple identification of comparison 
of signatures. Should the traveler lose his letter of credit, 
he will at once notify the banks upon and by whom it is 
drawn. 



49170 







Another instrument of transfer of credit funds for use 
in travel has been devised by the express companies. This 
is most extensively used by the American Ex- 
er^s check '^' V^^^^ Company, which has offices all over Eu- 
rope. Over 10,000 agents are authorized to 
pay these checks. The ease with which they may be re- 
deemed causes them to be received by hotels, railroads, and 



INSTRUMENTS OP TRANSFER 



71 



business houses about as readily as the money of the coun- 
try. They are issued to the traveler in denominations of 
$10, $20, $50, 
$100, and $200, 
to suit the con- 
venience of the 
purchaser. 
When issued, 
they are bound 
into a small 
check-book, 
and may be car- 
ried about as or- 
dinary checks. 
Pre caution 
against loss and 
for identifica- 
tion of the 
holder of a trav- 
eler's check is 
provided by 
having the pur- 
chaser sign his 
name in the up- 
per left - hand 
corner at the 
time of issue. 
When the check 
is presented for 
payment he is 
again required 
to sign his name 
on the lower 
left-hand cor- 
ner. The sig- 
natures must agree. The success of the American Express 




72 



WHAT ARE FUNDS f 



Company has led other foreign exchange houses to issue 
travelers' checks. A notable example is that issued by 




Brown Brothers. This house, with its international con- 
nections and long-standing reputation for honorable deal- 
ing, has an established credit which will be taken in trade 
anywhere in the commercial world. Its checks have the 
advantage of being more difficult to forge. Instead of 
having both signatures of the customer written on the face 
of the instrument, where one will serve as a copy for the 
other, the one selling the check to a foreign house must in- 
dorse his signature on the back. The cashier may then fold 
the paper in such a manner that the writing may be com- 
pared, as shown in the accompanying cut. It will be noted 
that on the face of the check is indicated its money equiva- 
lent, or exchange value, in each country where it may be 
used. Another house prominent in international exchanges 
which has adopted this method of securing patronage from 
serving the foreign traveler is Knauth E^achod & Kiihne. 
It will be noticed by reference to the exhibit on page 73 
that their check is, in form, almost identical with that of 
the American Express Company. 



INSTRUMENTS OF TRANSFER 73 

The money-order business of the country is enormous. 
As shown by the report of the Postmaster- General, the 
business done by the postal money-order de- 
2angecMe pai'tment, in 1901, was $274,500,000, while the 
Jbank money- same class of business transacted by the express 
^^ ^^' companies is estimated at $150,000,000 per year. 

With an aggregate of sales of money-orders amounting to 
$425,000,000 per year ($1,400,000 per day), the popularity 
of the traveler's check suggested that by use of an inter- 
changeable money-order the banks could handle a large part 
of a business which produces in fees about $3,300,000 per 
year. Mr. Percival Kiihne, of Knauth ^achod & Kiihne, 
was among the first to recognize this opportunity. Calling 



THWIzLEirS CHECK. jESZB? 



„f7/, //,r ,/y,MKm .,y,y^„//y,>'^ i 

f/J'T^o/kii'S or EOUIVALEST »s folloy,^: S>' 



^^ -t^-^.^>s:;;: -:^^^^,^'\-ff^^\ 






il^ 



A.^.^r^.^2....::.. 



■^'arcfu.-^ >~.'jS''Cor"Siaor'd witn <3C'Cve._ 



together the secretaries of the various State bankers' associ- 
ations, a bankers' money-order association was organized, 
with Mr. Kiihne as its president. The avowed object of the 
association is to compete for the enormous money-order 
business, by allowing every bank which becomes a member 
of the association to issue interchangeable certificates. The 
Western IS'ational Bank of New York acts as a clearing- 
house for the other members. In other words, the order is 
in the form of I^ew York exchange which will be accepted 
anywhere in the country. The banks are in a position of 



74 WHAT ARE FUNDS? 

advantage over the express companies, for the reason that 
the pnbhc is accustomed to dealing with the banks, and will 
find it an added convenience to purchase money-orders there. 



%Bankprs||0np^@lirfrA5soriaH0n. N? 



!2dK|5o<5^l| The Amount OFTH.sflJONEY Order has bee- re 



1-1"=-; uj oo* J i 




Izzzzzzzzzz 



The promotion and capitalization of the United States 

Steel Corporation furnished the leading sensation of the 

p, . opening year of the new century. The prin- 

credit in cipal dramatic feature, however, was not its 

modern nia2:nitude, — other concerns of lar^^e proportions 

finance. ^ ' b r r 

had been developed, — it was the suddenness of 

its rise. Within a few months scattered and isolated plants 
were reorganized financially, and grouped under wider 
and still wider management, until finally, with a rapidity 
that fairly staggered the world, all concerns were absorbed 
by one gigantic corporation — a billion -dollar " trust " was 
formed. Under a system of finance more primitive than 
our own this would not have been possible. The develop- 
ment of our whole modern system of economy lay back of 
it ; the growth of great financial institutions was a neces- 
sary prerequisite. Let us suppose, for example, that we 
had lived in an age of strictly money economy ; let us 
assume that it had been necessary to deliver coin to the 
amount involved in the transaction. If silver dollars had 
been used it would have taken one man fully five years to 
count out the change with business accuracy ; five-dollar gold 
pieces would have shortened the process four years, but still 
a year would not have been too long a time. Under a 
money economy, this one necessity — the difiiculty of count- 



INSTRUMENTS OF TRANSFER 75 

ing and making change — would preclude, absolutely, the 
large transaction of to-day. By the use of modern devices, 
the effort involved in this element of business is reduced to 
a minimum ; a transfer of any size may be made by a simple 
stroke of the pen. Using more jDrimitive methods than at 
present prevail, tlie process of accounting necessary to a 
consolidation such as that above referred to would have 
employed an army of men for months. Modern financial 
devices, modern financial institutions, modern systems of 
accounting, make the transferring of large interests a matter 
of a few moments. The settlement and adjustment of con- 
stantly changing business relations are quickly effected. 
The process of " clearuig," for example, allows the financial 
interests of the whole continent to be adjusted weekly. By 
modern financial institutions, and modern methods of com- 
munication, the world's business may be brought into daily 
contact and adjustment, if need be. In N^ew York, busi- 
ness to the amount of $150,000,000 per day is transacted 
and settled by the actual exchange of about $6,000,000 in 
coin. Between London and 'New York, business of some- 
thing like $3,000,000,000 is kept in constant adjustment 
with the transfer of only about $150,000,000 in gold, and 
a large part of this is shipped for manufacturing purposes. 
Even a country store doing a $20,000 business, by modern 
economy is able to effect its exchanges, serve its customers, 
and settle its accounts in various parts of the world with 
the actual use of only $500. With a metal reserve worth 
a few billion dollars, held for safe-keeping in the vaults of 
the large cities — and with this reserve practically undis- 
turbed — the commercial world is enabled to do its business 
without the use of any considerable amount of money-metal. 
Communities and nations are bound together by such finan- 
cial and commercial ties that the merchant or the farmer 
in western Colorado or South Africa may purchase goods 
in Hongkong, Xew York, or Amsterdam without offering 
a grain of gold or silver in exchange, and with no greater 



76 WHAT ARE FUNDS? 

inconvenience than that of going to his local financial agent. 
Whether it be the organization and capitalization of a billion- 
dollar corporation or the purchase of a spool of thread, the 
same commercial solvent is applied, the same instrument of 
economy is employed. It is the use of a universal system 
of credit that distinguishes the business methods of the l^ew 
World from the Old. 



PART II 
HOW FUNDS AEE OBTAINED 



CHAPTER Y 
FUNDS OBTAINED BY GIFT AND INHEEITANCE 

It has been observed by writers that exchange did not 
exist among the most primitive people. This may not seem 
Primitive strange when we take into account the chief 
econoyny— motives for their association. The family, per- 
efamiy. j^^pg^ represents the most primitive group, but 
its purpose is not industrial ; its bond of union is found in 
the instinct of love ; its race purpose is the propagation of 
kind ; its plan of organization is one of cooperation for 
mutual comfort and for the rearing of children. To the 
family, industry is incidental rather than an organic prin- 
ciple. Its cooperation is based on the sacrifice of self-in- 
terest — on the devotion of the substance and energy of 
ancestors and adult members to the young and to the com- 
fort of one another. As between members of such a group 
the necessities of life do not admit of commercial exchange 
without impairing the bond of sympathy and harmony 
which draws the members together and holds them in 
domestic relations. When, within the family, commercialism 
comes to be a dominant motive, when self-sacrifice and 
mutual devotion are relegated to a subordinate place, the 
family group itself breaks down — its component members 
attach themselves instead to commercial and industrial con- 
cerns, and the family organization is lost. Within the fami- 
ly, "gift" is the prevailing method of obtaining the means 
necessary to comfort and enjoyment. 

' 79 



80 HOW FUNDS ARE OBTAINED 

A larger and broader association is developed. From 
motives of mutual aid families group themselves into clans 
and tribes ; but in this, as well, industry is not 
thetrthe^^^ the dominant interest. Mutual protection is 
the tie that binds. Security against external 
foes and internal dissensions is found necessary to the high- 
est welfare of all. Within this larger groM^ puhlic welfare 
forms the dominant principle of organization ; but the race 
advantages of a smaller group for the propagation of kind 
(the family) cause it to persist within the tribe ; this still 
remains the unit for the care of the young, the unit of co- 
operation in ministration to want, of common devotion to 
the comfort and enjoyment of its members. Both princi- 
ples, however, being essential to the race, the clan or tribe 
(based upon the principle of protection), and the family 
(based upon the principle of common devotion), are brought 
into harmony one with the other. The protection secured 
by political organization gives more favorable conditions to 
the family, — conditions better adapted to the highest devel- 
opment of the individual members of the race; the social 
training within the family, the authority exercised, the 
order established and maintained among its members, better 
fit them for^ the broader tribal relations. In the family 
group the various dependent members are supported by 
" contributions " of those in control ; with the larger politi- 
cal group those in control are supported by " contribu- 
tions " of their dependents. 

Other groups may be cited in which exchange is not 

necessary to harmonious and effective cooperation ; but 

ntr.. ..^^ these, it should be observed, are also non-indus- 
Other non- , ', ' 

industrial trial in character. The Church, the club, so- 
groups. cieties — religious, educational, fraternal, and 

social, of which many might be enumerated — have for their 
dominant principle interests that are non-industrial. Each 
of them is dependent upon an industrial group for main- 
tenance and support. Each of them has a significance in 



FUNDS OBTAINED BY GIFT AND INHERITANCE 81 

industrial development, and to each, industrial cooperation 
is essential. These social groups have a bearing upon our 
subject, in that thej strengthen the bonds of association, 
and in their purpose give direction and character to the 
organization of industry. Being non-industrial, however, 
without independent income for their support, a large part 
of their " maintenance " must come from " gift," or some 
other form of " contribution," as distinguished from " ex- 
change." 

It is out of a condition of industrial " dependence " that 
" gift " and '^ contribution " arise ; as before suggested, it is 
with this method of obtaining funds that we 
funding ^ ^^^t become acquainted. The helplessness of 
method of the child, the necessity for care and protection 
epen en s. ^^^mg that period of life when he is attaining 
strength and vigor, throws on the parent the duty and ne- 
cessity of providing for his maintenance. In primitive 
Gocieties both males and females are industrial. With the 
development of art and invention and the means of supply- 
ing want in greater abundance, the father becomes the 
directing agent of productive enterprise, while to the 
mother is given over the care and training of the child. 
This increases the number of dependents ; to the infant 
dependent class is added the adult females of the family ; 
and with the increase in the number of dependent members 
arises an increased necessity for contribution by " gift." 
As civilization advances, as the period of training lengthens, 
the period of dependence also grows. Children get their 
first spending money from the hands of their parents ; as 
they grow to maturity, that instinct which is so necessary 
to the maintenance of the child during his infancy follows 
the ancestor; the interest which the parent feels in the 
development of his offspring is consideration sufiicient to 
cause him still to extend the means necessary to mainte- 
nance and comfort. This first goes out in the form of pro- 
viding training which would better fit the youth to move 



82 HOW FUNDS ARE OBTAINED 

and act with his fellows in the varied circles of life. In 
this the aim of parents is so to equip their ojffspring that 
they may enter into the complex relations of life capable of 
making judgments and of understanding the conditions 
necessary to highest success. Their hope and their aim are 
to raise the young, through a longer period of dependence, 
to a place of highest independence. This preparation, from 
the beginning, involves tbo use of funds, but in most cases 
the experience of the youDg is limited to the one way of 
acquiring them — viz., voluntary contribution. 

Where " exchange " becomes established as an essentia] 
part of industrial economy, " contribution " necessarily takes 
the form of " funds " as the more effective means of grant- 
ing support. Mother, child, missionary, priest, church or- 
ganization, social or fraternal society — every person, or non- 
industrial institution, that holds a position of 
contribution dependence, must look to the gifts and other 
usually talce forms of contribution of those in control of in- 
''fimdf'' dustrial income for their means of support ; 
they must rely upon the strength of the " ties 
that bind " the possessors of funds, upon their regard for 
kin, their desire for social advancement, or their response 
to ideals of higher civilization and progress, as a basis for 
their claims. 

Inheritance is simply one form of acquisition by 
"gift." It rests on the assumption that the properties 
acquired by the ancestor, which he himself does not use 
during his life, and which are not disposed of to others 
during his life, are intended to be given to 
obtained by ^^^^ heirs. The child, during his minority, has 
'^ inherit- been a dependent; for his support he has re- 
lied upon gifts. When he has reached his 
maturity, the same interest and regard which caused the 
father to give support and provide social and educational 
advantages, suggest the propriety of giving the boy his 
" start " in the business world. He recognizes the ad- 



. FUNDS OBTAINED BY GIFT AND INHERITANCE 83 

vantage of capital for business — of initial funds for the 
organization and management of industry. He knows that 
without some contribution of this kind his son for years will 
be unable to exercise his highest talents in the enterprise 
which he has undertaken as a life work. Funds are therefore 
provided by the parent for the business activity of the son, 
as they have been given before for support. With the family 
as a unit in social organization, with the law of property as 
the underlying industrial principle, inheritance passes into 
our system as a part of the law governing our institutional 
and social life. It is assumed that the ancestor, unless he 
otherwise bequeaths his property during his life, would have 
divided it among those dependent upon him at his death; 
that it is in their interest and for their welfare that he has 
put forth the effort to obtain the funds and properties 
which he possesses, and that this advantage would be pre- 
served to the members of the family were his will ex- 
pressed in a formal act. An acceptance of the principle of 
" trusteeshij)^^ however, as laid down by Mr. Carnegie in 
his Gospel of Wealth, would give quite a new applica- 
tion to the law of inheritance. Mr. Carnegie says that the 
acquisition of wealth is the result of a great cooperative 
process in which the whole society of workers (dependents 
as well as non-dependents) take part ; that for the purposes 
of carrying on this process to the highest advantage of all, 
some must give direction while others must attend to the 
minute details. Each and all, however, have assisted in the 
production of the means of enjoyment. While coopera- 
tion is advantageous for the purposes of producing the 
means of enjoyment, it is only by distributing this to the 
individual members that the means may be enjoyed — i. e., 
the means^ thus produced, must be applied to a use which 
will give satisfaction to individual want, and this can best 
be determined by each member for himself. Or, to put it 
in another way : while there is advantage in cooperation, 
the principle of personal freedom requires that this cooper- 
7 



84 HOW FUNDS ARE OBTAINED 

ation must be voluntary, and both the product to be used 
and the use to be made of the product must be determined 
by the individual who feels the want. No man shall be a 
slave. As a means of securing personal freedom and at 
the same time of obtaining the benefits of cooperation, the 
amount to be distributed to each as a return for cooperation 
must be left to a previous arrangement, l^ow, as Mr. Car- 
negie reasons, if under these arrangements or contracts of 
free cooperation the managers and directors have left to 
them a large surplus — a surplus disproportionate to their 
service, and disproportionate to their own needs and. the 
needs of those dependent upon them, — then these men should 
consider that they hold this surplus as a fund " in trust " for 
the whole society. To quote the words of this great direct- 
or of cooperative industry, whose feeling goes out toward 
his fellows, and who with his enormcfus wealth has taken a 
large social view of his responsibility, it is the duty of the 
man of wealth '' to set an example of modest, unostentatious 
living, shunning display or extravagance ; to provide mod- 
erately for the legitimate wants of those dependent upon 
him ; and, after doing so, to consider all surplus revenues 
which come to him simply as trust funds, which he is called 
upon to administer in a manner which, in his judgment, is 
best calculated to produce the most beneficial results to the 
community — the man of wealth thus becoming the mere 
trustee and agent for his poorer brethren, bringing to their 
service his superior wisdom, experience, and ability to ad- 
minister." The apphcation of the principle of tmisteesMp to 
the law of inheritance would very much enlarge the respon- 
sibility of the man of wealth. If accepted by the ruling 
majority of our people, the man in control of affairs would 
be regarded very much in the light of the manager of a large 
corporation in which the whole country were stockholders. 
Each one who labors in the common cause labors for an 
agreed salary or wage under the manager; the managers or 
directors are also entitled to vote for themselves a fair com- 



FUNDS OBTAINED BY GIFT AND INHERITANCE 85 

pensation — a competence with which to care for those de- 
pendent upon them ; these salaries, wages, and deductions 
should be considered in the nature of expense of operation ; 
net earnings, however, belong to the whole corporation ; 
they should be considered as a fund in the hands of the 
manager for distribution according to the obligations of 
the corporation to society, and are not for the benefit of its 
directors. On dissolution, the full assets of the company 
should be converted and distributed to the community as its 
stockholders. 

The importance of the principle of inheritance, however 
applied, can not be overlooked. For the dependent — the 
r , ^ ■ 1 recipient of funds obtained from ancestral con- 
importance tribution — an inheritance often obviates the ne- 

of gift and cessitv of securinp; capital equipment bv means 
'inlitvitaiice. o j. x -i t/ 

of a long process of accumulation (or saving) 
out of earnings; it shortens the time necessary to. acquire a 
fund sufficient to equip any business enterprise to be under- 
taken. It increases the opportunity and advantage of 
those members of the community who, having been well 
supplied with funds, have had opportunity to avail them- 
selves of the highest training, and who may therefore be 
best able to give direction and control to the affairs of the 
community. This advantage, however, may be lost. Op- 
portunities may be wasted ; absence of necessity may re- 
move the stimulus to effort which is essential to the devel- 
opment of cooperative industrial capability. The one to 
whom capital has passed by " gift " or " inheritance " may 
show himself unable to utilize capital to advantage. In 
such cases, by the very contest into which the business man 
is ever thrown and in which capital itself must be employed 
in order to become productive and return to its possessor an 
income for support, the properties of the incompetent pass 
over and become subject to the control of those who can 
use them to higher advantage. But when large productive 
estates or interests descend to those who have not a proper 



86 HOW FUNDS ARE OBTAINED 

appreciation of their responsibility, or who have not the 
ability or energy to give the best direction to their use ; 
when, by incompetence or waste, productive properties 
finally pass over to the control of those who are " not fit," 
there is a loss to the whole society, not only from the 
" waste " of the wealth which has come into the hands of 
the socially unfaithful, but by the " waste " of social force 
which comes from the disorganization and displacement 
occasioned by the breaking up of one scheme of cooperation 
and the readjustment and reorganization made necessary by 
the new. 

The law of inheritance is a rule which has grown out of 
the common impulse to care for and support dependents ; 

this impulse was evolved at a time when the 
inheritance, pi'oducing power of a group did not more than 

sufiice for support of its members — when the 
family was the all-imj^ortant race factor. It is an expres- 
sion of the common experience and common motive of the 
race directed toward its own perpetuation. Before the death 
of the ancestor all property acquired during life "belonged" 
to him ; by operation of the law of inheritance the property 
of the ancestor passed to his natural heirs according to an 
established rule of descent, unless the common law or rule is 
varied or set aside by a formal expression of the " will - ' of 
the ancestor, in which case " the last will and testament " 
governed. The formal expression of the decedent's " will " 
is known as a " devise," and the property or funds inherited 
in this way are said to be " devised" — i. e., they are passed on 
by him to others in the same manner as if he had disposed 
of them during his life. Laws controlling inheritance are 
necessary and wholesome. Laws controlling inheritance, 
however, may have the effect of protecting the use of funds 
and properties in the hands of the incompetent. Where such 
laws exist, the effect is to change the relation of dependence 
from one based on social welfare to one carrying with it social 
degeneration. Industrial dependence which is found to exist 



FUNDS OBTAINED BY GIFT AND INHERITANCE 87 

between members of a family, and which is incident to the 
maintenance of tlie church, to tlie support of fraternal and 
social organization, is the result of the saci'ifice of a lower 
to a higher interest. The perpetuation of race in greatest 
strength and vigor, the fostering of social and educational 
ideals, mutual protection and general welfare, are as neces- 
sary to a people as is physical maintenance and support. 
To this end many persons in our society have accepted 
places of industrial dependence in their devotion to higher 
interests. For this reason it is held by many of the great 
social and industrial leaders of to-day that those who are 
engaged in control of the industrial or business pursuits, 
and into whose hands the properties and incomes of the in- 
dustrial society come for distribution, must be regarded as 
holding them " in trust " for all the members who are de- 
voting their lives to common well-being. Laws of gift and 
inheritance which stand in the way of such a distribution as 
will further this interest, which condone " hreaches of trusV^ 
— laws which have been developed from ideals of private 
monopoly, and which have come down from those legal sys- 
tems in which " arbitrary power " took the place of the more 
modern notion of free cooperation based on '' general wel- 
fare" — are constantly the subject of legislative modification 
and political interest. Many changes have already been 
made, notable among them the abolition of the rule of primo- 
geniture. It remains only for the great political society to 
determine in this, as in all other matters of public interest, 
what rules of social cooperation they shall establish. 

Funds obtained by " Appropriation " 

The idea of appropriation is one quite different from 
that of gift. As before observed, gift is based on relations 
of industrial dependence. " Appropriation," on the other 
hand, proceeds from a notion of superiority or control. It 
is the method commonly employed by government as a 
means of obtaining funds for its support. It is the method 



88 HOW FUNDS ARE OBTAINED 

commonly employed by those engaged in many forms of 
industrial pursuit for obtaining those things from nature 
which will be useful to mankind but which have not yet 
been reduced to the control of others. Man has certain 
wants which he would supply. Around him is nature en- 
dowed with all the materials which are necessary to the 
satisfaction of want. To make these materials available to 
this end, however, they must be " appropriated " ; the ore 
must be extracted from the mine, fish must be taken from 
the sea, the timber of the forest must be reduced to owner- 
ship in forms which will be useful for supplying human 
" Appropria- needs. In primitive times among a primitive 
Hon'' a prim- fishing people, when dried fish was used as 
of obtaining money, the individuals of the community pro- 
funds. cured their funds by means of appropriation. 

Among a hunting people, skins of beaver and mink or the 
hides of other animals which served as money were pro- 
cured in the same way. Among a primitive agricultural 
people wheat and barley served the members of the tribe 
for funds, and under a primitive industrial regime the met- 
als obtained by the various members of the tribe or clan 
were passed from hand to hand as money, with no common 
stamp, design, or official voucher for weight or fineness such 
as is known to our modern systems of finance. When, how- 
ever, commerce and industry developed to such an extent 
that more careful judgments and closer estimates of value 
were made in exchange ; when the uncertainty of weight 
and fineness of the coins or metals used came to be an ob- 
struction to commercial and industrial progress ; when by 
common consent some uniform standard of judgment was 
demanded in trade, and the coinage of money was placed in 
the hands of a central agency of government which would 
give it character and undoubted integrity, then appropria- 
tion as a means of obtaining funds was abandoned. The 
only method other than that above described as pertaining 
to industrial dependence, was that of " exchange." 



CHAPTER YI 

FUNDS OBTAINED BY EXCHANGE 

" Exchange " is the common method of obtaining funds 
— the only method that belongs properly within the field of 
business. A young man may have capital given to him by 
his father with which to begin a business career ; by " will " 
or bequest he may receive a certain amount of money or 
other funds. Usually when other property is inherited, this 
will not serve the purpose of the one inheriting it unless he 
takes up and carries on the business of his father. Except 
in such cases, therefore, he will convert into funds the 
property inherited and then apply these to his own uses. 
An inquiry into the prevailing financial methods of ob- 
taining funds, therefore, is limited almost wholly to ex- 
change. The significance of this fact is that (except when 
funds are received by gift) the only way in which a work- 
ing capital may be obtained is by having something to 
sell — one must have something to offer, something for 
which others will give money or credit which may be used 
as funds. 

In this appears the limitations of men in their efforts to 

secure capital ; in this may be found the reason why each 

r . .. . of US may not obtain all the capital funds that 

Limit to '-' ^ 

funding may be desired. Before we can fund our en- 

power. terprise we must have something which those 

possessed of funds will receive in exchange for them. The 
idea so often found in the literature of money and credit 
that certain forms of funds need have no value, that they 

89 



90 HOW FUNDS ARE OBTAINED 

may be created by "fiat "of Government or by the "dic- 
tum" of some arbitrary or influential person, is absolutely 
without foundation in business experience. 

The capitalist of to-day is the man who has funds for 
sale ; he is a funds merchant. He sells his funds only 
when in his judgment he gets something in 
api a IS s. pg^^p^ which will be more valuable to him than 
the funds sold. He trades on precisely the same principle 
as the hardware merchant or the fruit dealer; the only 
difference is that the latter offers his wares for funds, 
while the capitalist offers his funds for other properties — 
usually for investments. One should no more expect to 
obtain capital funds without offering something in return 
than one should expect to obtain groceries or clothing with- 
out giving a quid jpro quo. 

Let us suppose for a moment that you were about to 
begin business ; that you had not inherited any property 
Wh t mav be ^ ^'^"^ ancestors ; that you had received nothing 
offered for by way of gift with which to " make a start in 
capital. life," How would you proceed to raise the 

funds necessary ? What would you have to sell ? What 
could you offer to the man of means — the capitalist, the 
funds merchant ? This question may seem entirely out- 
side the field of finance. ]^ot so. It is here that finance 
begins. It is this beginning that takes thousands of men 
and boys to the workshop. 

Sales of Labor 
In going out for employment laboring men are an- 
swering this question in a practical way. What have they 
to sell ? Their labor ; their abihty to serve those who have 
capital. Funds to them, as to others, have a double signifi- 
cance : (1) The first necessity that the laborer must face is 
that of maintenance. His power to serve others depends 
on his maintaining himself in strength and vigor. His in- 
come depends on continuous service. Unless he can so sus- 



FUNDS OBTAINED BY EXCHANGE 91 

tain himself as to serve with ability those to whom he sells 
his labor, income will cease. The Urst necessity, therefore, 
is for " maintenance fnnds." Let income fall below this 
mark and all possibility of industrial independence is gone. 
(2) The second problem to be solved in the funding scheme 
of the laborer is so to dispose of his services as to leave a 
surplus over and above the expense of maintenance — some- 
thing which may be laid by as " capital surplus." It is by 
use of this surplus that his industrial equipment must be 
procured. To procure the capital funds necessary to equip 
a business undertaking requires a long-continued process of 
exchanges of labor for wages, of saving a surplus, of accu- 
mulating this surplus into a fund which will be sufficient 
for his purpose, of expending it for " investments " or for 
" betterments." Assuming that you have nothing else to 
offer, this is the only means possible by which you may 
procure capital for business. 

Saving is the process whereby capitak funds are accumu- 
lated from surplus earnings. Capital funds acquired from 
earnings are the remainder after the subtraction 
civmg. ^^ expense and recoupment of losses. In the 

early part of the last century, w^hen industrial capital was 
small, the problem of saving was the most important one 
considered by economists and writers on finance. At that 
time the problem was one for the individual to meet single- 
handed ; to-day large financial companies are organized to 
facilitate saving — to help the laborer accumulate a capital. 
The small savings of the many are accumulated into large 
funds, which not only serve as a protection to the laborer 
himself, but which in the mass of accumulations furnish 
capital to large enterprises that give him further employ- 
men t. 

In this relation appears the importance of business 
training. The man who is trained only as an ordinary 
laboring man, the man who can not do more or better in 
serving those who possess means than any other man on 



92 HOW FUNDS ARE OBTAINED 

the street can do, must compete with him in the market. 

Among the many competing for work, some will be found 

who are willing to exchange their services for a wage barely 

sufficient to maintain them in bodily strength and comfort. 

If one is able to do only such w^ork as these 

Importance q^qy to do, then one must brinp; his standard 
of training. . ,..,,',, . ^, . ^ 

01 lite below theirs ; otherwise no margin or 

surplus will be left for capital use — a fund can not be 
acquired by saving. It is only by adopting a low standard 
of living that the Chinaman is able to " save." But what is 
your advantage if you have superior training ? While per- 
haps you have inherited no money, have had no capital 
funds given to you by family or friends, you have a " gift " 
which has quality quite as productive of income. More 
than that, while you retain your faculties you may always 
maintain an advantage over the ordinary laborer. It is this 
in part which has inspired your natural guardians to devote 
so many years to your training. Without a dollar, you are 
able to go out into the world, to maintain a standard of life 
that allows you still further to develop your faculties, still 
further to handicap your competitors, or to lay by '' in 
investment " an increasing fund with which you may finally 
equip yourself for the successful employment of the skill 
and labor of others in the management of a business of your 
own. 

Sales of Tangible Property and Business Interests 

Instead of selling your labor to others, instead of ex- 
changing your services for income in the form of wages, 
Sale of goods 7^^ ^^1 decide, after the first funds are saved, 
produced by to begin business in a humble way on your own 
account. Possibly you may undertake the busi- 
ness of shoemaking. Having saved enough to buy a small 
outfit, a few sides of leather, and having enough for a 
month's living besides, you may leave the factory wdiere you 
have been employed and open a shop of your owm. Let us 



FUNDS OBTAINED BY EXCHANGE 93 

suppose tliat one pair of shoes may be made in a day, and 
that the cost of materials and of living were $3 per day. It 
would not be long before all your funds would be exhausted ; 
but, instead of funds, you would have the products of your 
labor. Funds for future production must come from the 
sales of these products. If each pair of shoes might be 
sold for $5 per pair, then, if there were no items of loss, you 
would have a profit of $2 on each. This amount, by a 
strict economy, might be added to your capital. Accumu- 
lated funds from sales of shoes would allow you con- 
stantly to increase your business equipment. If, on the other 
hand, you were unable to dispose of your product in com- 
petition wdth the factory for more than $3 per pair, then a 
bare living would remain — your business would just pay 
expenses. A. further reduction in price would cause your 
capital funds to disappear ; it would become necessary for 
you again to fall back on the sale of your services to others. 
To those successfully employed in the management of 
industry, the chief source of revenue is from sales of the 
products of labor. 

It often happens that one has properties not adajDted to 
capital use. A private residence or a large private park is 
inherited ; investments that yield a fixed inter- 
propltiy not ^^^ ^^ rental may be owned. These are not 
adapted to funds for business ; they can not be utilized to 
Tloyment' advantage in the enterprise about to be under- 
taken. To one so situated the most practicable 
way of obtaining funds may be by the sale of these proper- 
ties. By conversion of these forms of wealth into capital 
funds a business may be equipped which will produce in- 
come in the form of profits. 

The shoemaker after equipping a factory may recog- 
nize a better business advantage in another locality. He 
may find that by moving to an inland point he can get 
water power where now he is required to use steam. The 
growth of population in new territory and the building of 



94 HOW FUNDS ARE OBTAINED 

new railroads may give advantages for obtaining raw mate- 
rials, and at the same time place him within range of a 
general market for his goods. He can not remove his 
plant, however, to advantage. Much of the 

The sale of machinery would not be adapted to water 
one business tt- i • i n i • i i- ^ 

interest to power. lie decides to sell nis plant lor what 

capitalize -^ ^^q brine^, as a means of obtaininp^ funds for 
another. °' * -n ^ 

the new enterprise. A miller may have in- 
herited a cotton factory from a brother. Every business 
advantage suggests the propriety of disposing of the cotton 
plant and using the funds to further his milling interests. 
This is one of the most common methods of obtaining funds 
in a country where industries are constantly shifting, as in 
our own. 

Labor and tangible property are not the only things 
that may be exchanged for funds. Business interests may 
rp, , . likewise be disposed of. Let us suppose that 
business the miller has been making a considerable 

interests. profit out of his business. But it appears that 
a still larger return may be had if he doubles his capital. 
His plant is a comparatively old one ; he is now grinding 
50 barrels of flour per day at a cost of $1 per barrel. Yet, 
owing to his favorable location, he is able to make a profit 
of $1 per barrel in competition with others. By the addi- 
tion of as much more capital (say $50,000), by using it to 
put in improved machinery and labor-saving devices, he 
would be able to grind at a cost of 50 cents per barrel and 
turn out 200 barrels per day. Instead of having a profit 
of $50 per day with a capital of $50,000, he would with 
his better equipment get a return of $300 per day on a 
capital of $100,000. But how is he to obtain funds ? He 
can not hope to raise the money from the sale of his serv- 
ices. His profits are already greater than would be the 
return in wages. He can not afford to wait until, by 
sales of goods produced, he may accumulate $50,000 more 
in funds. He has no properties other than those already 



FUNDS OBTAINED BY EXCHANGE 95 

employed in his business. He decides, therefore, to obtain 
the additional capital by selling an interest in his enterprise. 

Fortunately he finds another miller who has $50,000 in 
funds, and who is looking for a business opening. The 
„ , ^ books of the mill are gone over and its present 

partnership earning capacity is calculated ; the cost of im- 
tnterest. provement and the probable increased earning 

power is computed; the whole situation is carefully can- 
vassed. Each of the two men looks into the business stand- 
ing and reputation of the other. They finally come to an 
agreement. The first miller sells a partnership half -interest 
in his concern upon the condition that the second miller will 
put in $50,000 more of funds. With this the mill is newly 
equipped ; there is an increased return in profits to each. 

With the development of the wheat supplies and the 
wheat-growing resources of the vicinity in which the mill 
The sale of ^^ located, the partners find that they are still 
corporate unable to Supply the market with 'flour at a 
price that gives them a handsome return in 
profits to the company. Three-fourths of the wheat grown 
in the vicinity is shipped away for grinding, while they are 
not using more than one-third or one-quarter of the water 
power already developed. The question again arises, How 
may they obtain the capital with which to equip their in- 
dustry in such a manner as to take advantage of the pres- 
ent business 'situation ? To do this will require an expendi- 
ture of four or five times the amount expended in their 
present plant. They find no other miller who wishes to 
join with them in the business ; they have no properties to 
sell by means of which they may secure the funds. They 
finally decide to incorporate the business — i. e., to offer 
shares to those who have capital to invest, but who are not 
millers, and who would not care to participate as partners. 
By placing shares at $100 apiece on the market, they are 
able to sell 2,000 shares. In other words, they find that 
they are able to obtain $200,000 additional capital made up 



96 HOW FUNDS ARE OBTAINED 

of income from the sale of proprietary interests in the cor- 
poration to stockholders. With the additional $200,000 
they build two other mills of capacity and equipment simi- 
lar to the first. 

Capital stock is the total amount of capital funds of a 
corporation invested by its shareholders. The certifi- 
cates of interest held by investing members are called 
stock. Another term commonly used is " shares." This 
term is almost exclusively employed in England. There, 
" stock " has the same significance that the term '' Govern- 
ment security" has in America. The stockholders of a 

corporation are those who make the joint con- 
fto^k^^ tributions to the capital funds or capital stock 

of a corporation. They have (1) such cor- 
porate rights as : To participate in the organization of the 
company, to attend meetings of stockholders, elect ofiicers, 
to hold meetings for the purpose of determining the powers 
to be granted and the rules governing their officers and 
agents, to give direction to the general policy of the cor- 
poration through the officers elected, etc. ; (2) the financial 
riglits, ^r^^, to share in the dividends set apart for the share- 
holders out of the net profits of the business of the cor- 
poration ; and, secondly^ to have a share in the capital dis- 
tributed to the stockholders after the corporation proper 
has been sold and its affairs wound up. While the cor- 
poration exists, however, the stockholder has no right to 
touch a dollar of its assets or transact any of its business. 
The capital once contributed becomes the property of the 
corporation absolutely. The stockholder may be said to 
have sold a certain amount of his money, or credit, or other 
property, to the corporation, and in return has received one 
or more shares of its capital stock, the amount being esti- 
mated in the funds-equivalent or price of that which has 
been sold. For example : In the organization of a corpora- 
tion a certain amount of the stock may be issued in ex- 
change for plants purchased at an agreed price, -while other 



98 HOW FUNDS ARE OBTAINED 

shares may be sold for '^ cash." E'o one may transact any 
business for the corporation except a duly authorized officer 
or agent. The business of a corporation is in the hands of 
its officers. The assets of a corporation belong to the cor- 
poration as fully and completely as the moneys in the 
Treasury of the United States belong to the Governmentc 
A stockholder has as little right to appropriate assets and 
to attend to the business of the corporation as has a private 
citizen to take money from the public treasury or to attempt 
to do the business of the Grovernment. 

A stock certificate is the written evidence of a propor- 
tionate amount of the total capital which has been invested 
by a single stockholder in the stock of a corpo- 
certificates. i*atic>n. The capital stock of a corporation is 
usually divided into shares having a funds- 
equivalent of $100 each. That is, if a company were or- 
ganized with a capital of $100,000 they would have 1,000 
shares of stock to sell. Each person who buys or sub- 
scribes for " stock " receives a " certificate " which indicates 
the number of shares which he has purchased by exchange 
of money or other property. 

The differences between a corporation and a partnership 
are many. In the first place, each partner may transact 
any business for which the partnership was organized, and 
each partner is liable for all the debts of the partnership. 
In a corporation, however, the stockholders have no right 
^.^ to transact any business of the concern, this 

beiwee?i cor- being left to the properly appointed agents, 
poration and and the stockholders are not liable for the debts 
of the company. -', With the death or with- 
drawal of a partner the partnership becomes dissolved, and 
the business of the partnership must be wound up. The 
death of a stockholder does not in any manner affect the 
life of the corporation. Its business may go on regardless 
of stock ownership. A. partnership interest may not be 
sold w^ithout the consent of the other jmrtners ; a stock 




Lof 



.0! W. 



loo HOW FUNDS ARE OBTAINED 

certificate may be transferred at the pleasure of the owner. 
The responsibility of a stockholder is generally limited to 
the amount of his stock purchase. If the business is poorly 
managed he may not receive dividends on his stock; 
through the bankruptcy of the corporation he may even 
lose his invested capital ; beyond this, however, he is sel- 
dom held liable. In some cases, as in banking concerns, 
stock liability is somewhat enlarged, and the stockholder 
is held responsible in double the amount of his investment. 
Aside from those above enumerated, the advantage of 
corporate organization is found in the amount of capital 

funds or funds-equivalent of property that may 

Financial ■, n • -i • o i -x • i 

advantage of be secured m this way. bo long as it is made 

the corpora- to appear to the investor that he can obtain a 
tion 

fair return in dividends, there is practically no 

limitation to the amount of capital that may be drawn to- 
gether by the sales of stock. Being assured of competent 
management, the man with $100 may contribute with the 
same degree of confidence and the same prospect of re- 
turn as the man with ^1,000 or $10,000. The only limit 
to capitalization is found in the limit of profits. The fact 
that the business itself is a local one, however, may so far 
confine the knowledge of its management and of its profit- 
able character to its managers that but few persons having 
funds to invest will care to purchase shares ; such an indus- 
try as milling, therefore, is usually confined to a local 
investing constituency. 

The partners to the milling enterprise had found a mar- 
ket for 2,000 shares of stock. Besides, the old plant of the 
partners was turned into the corporation at a 
stocic!^^ valuation equal to $100,000 ; in the new cor- 
porate concern each of the partners was given 
$50,000 worth of stock. This made the total capital stock 
$300,000. These contributions were all made under simi- 
lar conditions and conferred on the purchaser similar 
rights. The common stock of a corporation is that repre- 



FUNDS OBTAINED BY EXCHANGE 



101 



senting the interest of contributors of properties or funds 
who are entitled to dividends and to exercise corporate 
powers without preference. 




After the expenditure of the $200,000 contributed, the 
wheat-growing region suffered a drought, and the supplies 
of wheat for milling fell so far short of former yields that 



102 HOW FUNDS ARE OBTAINED 

the plant could not be rim to more than one-third its ca- 
pacity. Moreover, the wheat was of inferior quality, and 




the flour produced could not be sold at a profit in competi- 
tion with flours ground in other places. At the end of a 
year it was found that the miUing company had suffered a 



FUNDS OBTAINED BY EXCHANGE 



103 



loss of $50,000 — had incurred a floating debt, payment of 
which was demanded. This gave rise to a new situation — 




a new demand for funds, one which could not offer a 
" profitable " business as a funding base. Under such cir- 
cumstances the common stockholders decided to hold a 



104 HOW FUNDS ARE OBTAINED 

meeting to determine how the $50,000 might be raised. 
Thej did not feel disposed or able to purchase more shares 
in the stock of the corporation. Another expe- 
stock^^^ dient, however, was at hand — the issue of pre- 

ferred stock. The preferred stock of a corpora- 
tion is usually given to secure some obligation of the company 
or to meet some special demand for capital when common 
stock may not be disposed of to advantage. To this class 
of stock are given special dividend privileges — that is, this 
kind of stock is entitled to a preferred claim against the 
profits of the company. If a man holds a share of pre- 
ferred stock he will receive dividends on it before any divi- 
dends are given to the common stockholders. The con- 
tract of preferment, as in the case of the Loder Brewing 
Company, may also give a first claim to holders of preferred 
stock on distribution of funds in the dissolution of the com- 
pany — ^the preferred stock may be given a right to have its 
proportion of capital repaid before any distribution is made 
to the common stock. This being a bad year for the mill, 
and there being a prospect for a future profit, such an 
arrangement allowed the common stockholders to dispose 
of preferred shares for funds with which to pay the float- 
ing debt of the corporation. 

There may be several kinds of preferment — e. g., the 
common stockholders together may decide to offer to those 
Kinds of ^^^ ^^^^ contribute new capital, a preferred 
preferred^ right to have 6 per cent dividends paid to them 
^ ^^ * out of the funds set aside for the payment of 

dividends before the common shareholders shall receive any- 
thing at all. Again, an agreement may be made whereby the 
preferred stockholder may have a first distribution of 6 per 
cent in preference to the common, and then after the common 
stock shall have received 5 per cent, if there be any profits 
remaining, the preferred stockholder may have a preferred 
right to 3 per cent more. 

If, later, another contribution becomes desirable, and the 



106 HOW FUNDS ARE OBTAINED 

common together with the first preferred stockholders are 
not able to furnish the funds needed, they together may 

agree to offer for sale another series of shares 
f erred and which shall take precedence over both former 
secondare- issues, and in which the new issue shall stand 
•^ ' as first preferred and the others in their former 

dividend-paying relations. The new preferred, therefore, 
would have first claim, the old preferred second claim, and 
the common would have third claim to dividends. 

The conditions of preferment may be such (in case divi- 
dends are not declared at a regular time agreed upon and 

to the amount provided) that the amount of 
and non- dividend which is " passed," that is, which passes 
cumulative over as not paid, shall " cumulate " and become 
prejeiie . ^^ additional charge against the amount set 
apart as dividends to be paid to the preferred stockholder 
out of future profits before the common stockholders 
may participate. If no such provision be made in the con- 
tract of preferment, however, the stock is "non-cumula- 
tive," and a " passed " dividend will be lost to the preferred 
stock. Under the cumulative feature of preferred stock, 
it will readily be understood, a number of " passed " divi- 
dends may become such an enormous charge upon the future 
earnings of the company as to render the common stock 
practically worthless. On the other hand, the " non- 
cumulative " feature may allow the common stockholders, 
through their ofiicers, to delay the payment of dividends 
on preferred until such a surplus has been acquired by 
the company that the common stockholders may receive 
much more than their proportionate share of the profits ; 
without a cumulative preferment, the representatives of 
the common stock may continue to apply the profits to 
improvements until the industry shall become so highly 
profitable through added capital that the regular return 
to the common stock may far exceed that which is fixed for 
the preferred. 




4 - — ^ ^ -. ^ .X ^- ^ O - 5 ,$ s " ^ \ V 



108 HOW FUNDS ARE OBTAINED 

It sometimes happens that a number of stockholders may 
wish to pool their holdings in a company for purposes of 

control. To this end the stockholders agreeing 
'^^J^i / will appoint a trustee to hold the stock and 

exercise all rights of control for them. The 
trustee gets his powers from a written trust agreement, un- 
der which he pays to the several stockholders the dividends 
declared, and finally delivers the shares after the trust 
agreement is terminated. When such an arrangement is 
made the trustee issues to each stockholder depositing his 
stock a trust certificate. One of the trust certificates issued 
by J. P. Morgan & Co. as trustee for Keading First Pre- 
ferred is given on page 107. An examination of the certifi- 
cate will further explain its use. 

Other special forms of stock, such as guaranteed stock, 
founder's shares, treasury stock, etc., are allowed under the 

laws of some States. These might be enlarged 
Other forms ^p^^^ i,^^i for the purposes of this treatise it is 

sufficient to call attention to the principal pro- 
prietary interests which may be sold as a means of obtaining 
funds for enterprise. We pass now to a consideration of 
sales of credit. 



CHAPTER YII 

FUNDS OBTAINED BY SALES OF COMMERCIAL 
CREDIT 

Theke are still other ways of obtaining funds bj ex- 
change — methods which do not involve the sale of labor, 
tangible properties, or business interests. If one has salable 
credit, this may be disposed of to meet the funding needs 
of business. In Part I credit was discussed as a form of 
funds. We will now discuss its use as a means of obtaining 
funds. 

Credit is bought and sold in the market in the same 
manner as are services, or stocks of merchandise. Before 
The extent a sale of credit may be made, however, one 
of credit must find a purchaser — some one who is will- 

uses oy the . •'^ t r. i /. 

laboring mg to exchange money or credit funds for a 

man. promise to deliver money at a future time. In 

this is found its limitation ; it is this that places it beyond 
the reach of the ordinary laborer as a means of obtaining 
capital. The day-laborer goes to the man of means (the 
capitalist), and proposes to give him his promise to pay $110 
one year hence for $100 in gold. The man of means says 
" N'o." Some such reasoning as this goes on in the capitalist's 
mind : " You have never been able to do more than main- 
tain yourself." " Yes, it is true you have paid your account 
at the grocer's ; you have kept faith with those who have 
furnished the means necessary to ' maintenance ' on credit, 
but you have never displayed any ability to acquire ' capital.' " 
"What surpkis earnings you have had were dissipated." 
"You have not the ability nor the integrity to make your 

109 



110 HOW FUNDS ARE OBTAINED 

credit good." In other words, in tlie judgment of the capi- 
talist, the credit which the laboring man tries to dispose of 
for capital funds is seldom considered worth as much as the 
money for which it is offered. The capitalist will not trade. 
One with thriftj habits and good training, on the other 
hand, may meet with greater success. On leaving college 
you may go to a banker to whom you are known and offer 
him your note. At first he may be unwilling to buy your 
credit. You may even have trouble to find a business man- 
ager who is willing to buy your services. But eventually 
you get employment. You demonstrate your ability. Yoa 
show yourself to be a man capable of performing a service 
for which employers are willing to pay $1,000 or $2,000 
per year. You exhibit some special fitness for the manage- 
The man of ™^^* ^^ direction of some industrial function ; 
ability a7id perhaps you have invented something, the use 
integrity. ^^ which will be of advantage in production ; 
you demonstrate that you have the power to form judg- 
ments of such superior quality that a business dependent on 
such decision may be handled with increased profits. Now, 
without capital, with nothing but this ability displayed, and 
a reputation for habits of industry and integrity, you again 
approach the man of means and offer your credit for funds 
with which to capitalize your advantage, and he is willing — 
even anxious — to exchange. Why is this ? Why are you 
able to procure capital funds " on credit," without awaiting 
the slow process of saving, while thousands of others are 
required to depend on the surplus accumulated from wages 
earned ? The answer is plain. The capitalist believes that 
he is making a good trade. You have something to sell, 
besides your ability to work for others, which he values 
more highly than he does the amount of money for which 
credit is offered — your ability to use capital in such a way 
that you will be able to deliver the amount obtained " with 
interest." The man of means sees in the transaction a 
profit to himself. In exchange for funds sold, he gets a 



SALES OF COMMERCIAL CREDIT 111 

claim to future income whicli, in his judgment, will be to 
his own advantage. 

One possessed of tangible property or business interests 
has still less difficulty in convincing the capitalist of his 
ability to meet his contracts for future delivery. He offers 
to sell credit because he does not care to sell his tangible 
The man property or business interests. The property 
tvith gives a double advantage : by its use a larger 

property. income is assured; if this larger income does 
not suffice, the property is still capable of being sold as a 
means of obtaining " funds " with which to meet credit con- 
tracts. All of this is taken into account by the one to 
whom the man with property offers to sell his credit. 

Credit Instruments used as a Means of 
OBTAINING Funds 

A promissory note is a written contract for the future 
delivery of a specified sum of money. The contract is 
similar to that made between speculators in 
Promissory g^^in or securities known as futures, except 
that the " note " is for the delivery of money 
instead of a particular grade of wheat or a particular class 
of bonds. The delivery must be made on or before a stated 
time, and nothing will satisfy the contract except the de- 
livery of the particular thing promised. 

There is nothing fixed or prescribed about the form of 

the promise ; it may be expressed in any way so long as its 

„ ^ essentials are present. These essentials will be 

Forwi oj note 

set forth in detail. Being a contract in writing, 

the parties must be set forth in the instrument. There 

must be at least two parties named — the one to whom the 

promise is made and the one making it. The 
varties ^^^ making the note is called the maker ; the 

one to whom it is made is called the jpayee. 
The maker usually signs his name under the writing which 
carries the promise. There may, however, be two or more 



112 HOW FUNDS ARE OBTAINED 

makers of the same note. A note that has two or more 
makers is called a joint note. Joint notes may be made by 
each individual signing his name individually, or in case 
several persons are combined in business relations as part- 
ners, one of the partners, or one authorized to sign the 
partnership name, may subscribe the name of the partner- 
ship and bind them all. The payee may be the one whose 



Johnstown, Pennsylvania, June 30, 1900. 

Thirty days after date ive joi7itly promise to pay to 
Sylvester Jones, One Thousand Dollars, with interest at 
the rate of six per cent per annum. 

BiEDWELL, Smith & Beown, 
by Vaughak Browi^. 



name is inserted in the note at the time it is made and de- 
livered. Commercial usage, however, has allowed the words 
" or order " to be added. Such expressions as " Pay to [name 



c-^&n 




ma. 






ms. 



^ %^iv*»%» 




of payee] or order," or "Pay to the order of [name of 
payee]," indicate that the one named may, in writing, di- 
rect payment, or delivery, to be made to some one other than 
himself. Above is a form of note that is defective, for 



SALES OF COMMERCIAL CREDIT 118 

the reason that no payee is named in the instrument. This 
defect may be overcome by negotiating the note. 



Baltimore, Maryland, January 10, 1899. 

On the first day of September, 1899, we promise to 
pay to Martin Lowden, or order, the sum of One Hun- 
dred Fifty Dollars, with interest from date at four per 
cent till paid. Louis Sampson. 

J. L. McKekzie. 



The right granted to the payee named, to order pay merit 
to he made to another^ does not make the contract any less 
2 Words of ^®^*^^^ ^s *^ whom payment is to be made, but 
transfer- it gives to the instrument higher value by mak- 
abihty. -^.^g ^^ negotiable. ITegotiable in the commer- 

cial sense means transferahle \ a negotiable note is one 
which may be transferred from one person to another by 
SQch acts or writing as is necessary to give evidence of the 
right of the person presenting it to receive payment. The 
insertion of the words "or bearer" instead of "or order" 
effects the same end. This makes the note negotiable with- 
out assignment or indorsement ; nothing need be added to 
it to show title or a right in the one presenting it to receive 
payment. A note that has no such words as " or order " or 



New York City, July 5, 1900. 

One year from date I promise to pay to John P. Lar- 
kin, or hearer^ the sum of Two Hundred Fifty Dollars, 
gold coin of the United States of present weight and 
fineness, at the Chemical National Bank. 

Charles 0. Pastoeius. 



" or bearer " added after the name of the payee, but on its 
face makes the money promised payable to a definite per- 
son, is not transferable and is non-negotiable. 



114 HOW FUNDS ARE OBTAINED 

The promise clause contains the essence of the agree- 
ment, and though it may take any form of expression, the 

meaning must be an unconditional obligation 
of promise. ^ ^^ *^® P^^* ^^ *^^ makers to pay a definite sum 

of money. In case there be more than one 
maker, the expression " we promise," or " we jointly prom- 
ise," means that each of the makers agrees to pay a certain 
proportion of the amount of money named ; while " we 
jointly and severally promise " means that each one of the 
makers will pay the whole amount if the others fail to pay 
their proportion. The promise clause may be simply a 



$2,346.22: 

We jointly and severally promise to pay to the United 
States Trust Company of St. Paul, Minnesota, the sum 
of Two Thousand Three Hundred and Forty-Six Dollars, 
on the tenth day of December, 1893, with interest thereon 
at the legal rate till paid. Geoege P. Austiit. 

St. Paul, Minnesota, MaeSHALL Mehan. 

September 10, 1893. AlOKZO Poetee. 



promise to pay an amount stated at a given time. In this 
case no other amount may be collected at that time. But 
that part of the contract which contains the promise is 
usually in two clauses : the one contains a promise to pay 
a definite amount called the "principal" sum, and the 
other states a second proportionate sum to be paid as "in- 
terest." This later claim is sometimes in words which re- 
quire a mathematical computation in order to determine the 
amount due. The principal, however, must always be a fixed 
sum ; otherwise the amount of interest may not be deter- 
mined, and any uncertainty as to the amount due would de- 
stroy its character as a promissory note. Sometimes the addi- 
tional sum, called " interest," is made the consideration for a 
separate note, in which case the interest sum appears as a 



SALES OF COMMERCIAL CREDIT 115 

definitely determined amount. A contract made payable 
in anything but money is a form of obligation that would 
be enforced, but it would not be a " promissory note " ; it 



$50.= Peoria, Illinois, January 27, 1898. 

On the 27th day of July, 1898, I promise to pay to Ja- 
cob Straussner, or order, the sum of Fifty Dollars, at his 
office, No. 234 Main Street, with interest at the rate of 6 
per cent, after maturity, the same being for an instalment 
of interest due on that day upon my principal promissory 
note, of even date herewith, payable to Jacob Straussner, 
or order, three years after this date for the sum of Two 
Thousand Dollars ($2,000). j^ ^ Fkench. 



would not pass as commercial paper. Such contracts are 
common in the market-place, but they are not usually 
made negotiable, and would not be called " credit instru- 
ments." They are not in any wise treated as such. 

The date of making and issuing a note has a double sig- 
nificance. In the first place, it is the common custom to 
4. As to date ^^^^ a note payable a certain number of days 
of making a or months after date, though some bankers and 
business men now consider it better form to 
draw notes and time drafts payable at a certain time stated 
in the instrument, as, "On the 10th of March, 1897, I 
promise to pay." In this case a date of making is not 
necessary. In the second place, the date of the note may 
aflPect its validity. In most Christian countries a note made 
and issued on Sunday is void. The date of maturity is the 
day on which a note becomes legally due — the day on 
which the payee has a right to demand the money prom- 
ised. The date of maturity can not be left indefinite ; no 
doubt must be left as to the time when demand for pay- 
ment may be made. In finding the date of maturity it is im- 
portant to remember that when a note is drawn " days after 



116 HOW FUNDS ARE OBTAINED 

date'^^ the actual dajs must be counted, aud when drawn 
" 7nonths after date " the time is reckoned by months. At 
common law a note is not legally due till three days after the 
expiration of the specified time. These are called " days of 
graced The party making a note may waive the right to 
days of grace by express contract in the instrument itself. 
Some jurisdictions have made this unnecessary by statutory 
enactment. Where " days of grace " are abolished by 
statute the note falls due on the day stated in the contract. 



$25.= Stokesville, Montana, June 20, 1898. 

I hereby promise to pay to the Stokesville National 
Bank the sum of Twenty-Five Dollars, three months 
from date, interest at one per cent per month, tvitliout 
grace^ the usual three days of grace leing herely specific- 
ally waived hy me- Lawbence Logan. 



The maker's signature must appear in some form upon 
some part of a promissory note. It usually appears imme- 
diately after the written promise, though it 
siqnature ^^7 ^^ placed on any part of the instrument 

and still bind him to the performance. It 
need not be afiixed by himself, however ; signature may be 
made by any authorized attorney or agent. It may be the 
full name or only the initials. The usual business signa- 
ture should be used as a matter of avoiding doubt or ques- 
tion. When a man who can not write is asked to sign a 
note or other legal instrument, the usual custom is for some 
one else who can write a legible hand to inscribe his name. 
This should be so written as to leave space in 
sianature *^^® written line for a cross. After explaining 

the nature of the instrument the signer or maker 
is asked to place a cross in the space left, as shown in the 
exhibit. Above and below the cross, and in the presence of 

his 

the signer, is written X . Such a signature should also be 
mark 



SALES OF COMMERCIAL CREDIT 117 

witnessed. A witness is essential for the reason that the 
signer may afterward deny that he executed the contract. 

Aside from the essential parts, there are various clauses 
added from custom or local practice that do not affect its 
. validity nor add to its obligations. One of the 
dausll most frequent of these is the phrase "for value 

" Value received." Thousands of good notes made 

received." ^^^ithout any value consideration stated in the 
instruments themselves are handled daily. Notes contain- 
ing this phrase are an old form of written evidence of the 
credit contract ; the newer forms drop this word- 
" Without ^ j^g^ In Pennsylvania the words " without def- 
defalcation:' ^^^^^-^^^ „ ^^^ inserted. This is wholly super- 
fluous. '' Credit the drawer " is sometimes inserted in the 
lower left-hand corner with the signature of the payee. 

:^ 




•4 Urt^ 1 Uo-»^»-o<*-^c>U(-)i^ ~ 



</ / -tJoL Q,CO^^ tfi I/UaX^. (ju^^^yULAA^tfi^ 



V/h 



\ 




^^6uu u ix r^ 



The manner of using such a note is as follows: Lean- 
der Jones wishes to borrow $100 from James Thompson. 



118 HOW FUNDS ARE OBTAINED 

For this he offers his note for the amount desired. The 
note is executed in regular form. Instead of Thompson 

giving to Jones the money, or his check for 
'dmwev'^^^ $100, however, he writes on its face, "Credit 

the drawer," and indorses it. Jones then takes 
the note to his bank and exchanges it for a bank ac- 
count in the same manner as if Thompson had given his 
check. This form of note is also used to evade the " mar- 
ried woman " clause of the law, which prohibits contracts 
of surety and indorsement. John Patterson, the husband 
of Augusta Patterson, wishes to obtain funds on the credit 




^S^M:...., Bethlehem, Pa.,,/&pe^.c^J.tAr^^d90L 

^.^<t::X!'t!<re^i4^f^^^ after date..^ — -prorm.sr hi 

p Pay to the order of ..^J?-t,^<^p*^S^-....A 

^Jf?e First )\Iatio9al Bai^K of Betf^let^em. 



without, defalcation for value received 

Credit the Drawer 




of his wife. He therefore executes his note to her. She 
enters on its face, " Credit the drawer," and then indorses 
it. This allows John to obtain the funds needed by dis- 
counting it. Ostensibly John is the maker of the note ; in 
reality it is Augusta that is the responsible party. 

Another peculiar use of this form of note is given 
opposite. A number of parties are commonly interested 
in raising funds. They arrange for accommodation by 
co-signature. The names of all the parties who are to 
sign are entered on a marginal slip, with the understand- 
ing that the note will not be complete till all have signed, 
it being understood that each is to become responsible 
for a jpro rata only. The first to sign is understood to 
be the drawer, while all the others are accommodation 
signers. 



SALES OF COMMERCIAL CREDIT 



119 



Date 

Amount, $ 

Time 

Due 

Discount . . . Days 
Renewal of I ... . 



Leonard Grafton. 
Hiram Hadley. 
Peter Mclntyre Brown. 
Tyson & Mowbry. 
William A. Custard. 
L. A. Marks. 
Latshaw Grocery Co. 
J. B. Samuelson. 
E. Browning. 
Alonzo Parkinson. 
Uriah Lundy. 
P. B. Cornlee. 



Reading, Pennsylvania. 



We, the undersigned, promise 
to pay to The Garden City 
Steam Paper and Box Manu- 
facturing Co., or order, 

month after date, the sum of 

Dollars, 

without defalcation for value re- 
ceived, at the Keystone Na- 
tional Bank of Heading, Pa. It 
is understood andagreed, however, 
that the liability of the subscrib- 
ers hereto is limited in such man- 
ner that each shall be obligated 
only to pay such an amount there- 
of as is ascertained by dividing 
the whole amount of the note by 
the number of subscribers. 

[Signed] 
Credit the Drawer. 

The Garden City Steam 
Paper and Box Manu- 
facturing Co. 



Treas. 



o 



120 HOW FUNDS ARE OBTAINED 

The parts of a note containing contracts of security for 

payment when due (expressed or implied) are found : (1) In 

^ ^ ^ , its sii>:natures of accommodation, indorsement. 
Farts of note ^ . . ,/ ' 

containing or guarantee — 1. e., m contracts toy personal se- 

contracts of cic/'ity. (2) In its special clauses carrying trans- 
security. „ n li i . '{ ^ 

lers 01 collateral, powers to enter judgment by 

confession, without action, rights to levy execution, etc. — 

i. e., in contracts for lien security. 

An accommodation signature is given as security for the 

payment of a note by one having no interest in the funds 

obtained by means of the instrument sold. For 

T) 7 

secuHhi example, one may apply at a bank for a loan. 

He oifers his note for $105 (principal and inter- 
est), due one year hence, in exchange for $100 in cash. 
The banker refuses to take the note at that price, and the 
one offering it does not care to sell it for less. He has a 
friend with him, and the banker offers to give $100 for the 
note if the friend accompanying him will become an " ac- 
Aocommoda- commodation signer." His friend agrees, and 
tion signa- the trade is made. In form the note is a joint 
^ires. ^^g — ^^ i^ict^ it is "accommodation paper." The 

maker's friend becomes jointly liable with him for the pay- 
ment of the note, but his obligation is purely one of " ac- 
commodation " — that is, the value of his credit (of his ability 
and integrity) is added to the principal maker's as security 
to the banker for the payment of the sum contracted for. 

Indorsement is another form of contract of security. 
Samuel Johnson is owner of a note or contract made, where- 
by Alonzo Grey agrees to deliver $1,000 to 
Indorsement. ^, ^ i- a i t i ^i -c^- 

the order of Samuel Johnson one month alter 

June 17th. Johnson takes the note to a " commercial paper 
man " and offers to sell it for $995 — i. e., he offers six per 
cent discount as an inducement to purchase. The dealer, 
however, does not know Alonzo Grey, and is not willing 
to purchase his contract to pay without security. He is 
willing to purchase Johnson's credit, however, at the price 



SALES OF COMMERCIAL CREDIT 



121 



offered. He therefore proposes that he will give the 
amount asked for the note provided Johnson will indorse 
it — write his name across the back. When a note is 




$JJO_QMr Bethlehem, Pa^it^<J. /"/ ^ /90/ 

„..<!^Ls-_-...?1?*iy7-i:^e^ — ^^^C4<tyi after date.. -^....promise b 
' lAe order of 




THE FIRST MTIOMAL BAM OF BETHLEHEM. 



witlumt defalcation for value received. 




made payable " to order," the writing of the name of the 
payee across the back performs two services. In the iSrst 
place, this is necessary in order to assign or transfer the 
right to receive payment ; a note which is made payable 
"to bearer," however, needs no assignment, and indorse- 
ment is not necessary for this purpose. In the second place, 
the " indorsement " is a contract of security — it carries with 
it an implied promise of the indorser that he will pay the 
amount promised on the 
day it is due, if the <-Vj yy 

maker fails to do so. ^^^ 

Indorsement is usually 
made in blank — that is 
to say, with- 
out the words 
" Pay to the 
order of." The purchas- 
er of the note is then 
free to pass it on from (^ y^ 
hand to hand without oc^cZ 

further assignment. In ^ryxy -p-,.,^^^ 

such case, further in- 

dorsement could be for security only. If the owner of a 
note wishes simply to assign it — that is, to transfer the right 



Without 
recourse. 




J^y^. 




122 HOW FUNDS ARE OBTAINED 

to receive payment from the maker, without also becoming 
responsible for the fulfilment of the promise — this may be 
done by adding the words " without recourse." The eifect 
of this is to deprive the indorse- 
ment of its character as security. { . ^ 
Eelease from liability on contract ^^*'*^^ rVyi.^.^vu^ 
of indorsement after it is made 
may be by separate agreement. c:^-^^*^^,,.^^^:^ 

One may guarantee the pay- ^ u 

ment of a note without indorsing ^^/^-^^^^-^J "^"^ 

it — i. e.j by entering ^;^U**<.^J;^-^,^L^^2i/' 
Guarantee • . jj-j.* i 'T 

of note. into an additional writ- ^ ^-..^ .^^.^^>^ 

ten contract. If there t J -z^ c .?«r^ 

has been any advantage gained, ^^ ^ 

any new consideration passed at /-*^'^ -^ A.^ M^./. 

the time such guarantee is made, ^f^^' 

the contract will be valid and the /SA^ ^^^^^uc^ 

guarantor may be held for its pay- 4,^s:Ji^s3. /^/ 

ment. Without consideration the 

guarantee is void. The guarantee is usually in form of 

a separate writing and not made upon the note itself. 



FOfR VALVE 'RECEIVE'Dr-- — hereby guarantee the prompt payment, at maturity, 

of the following described noU , executed tmder seal ■ — 



and endorsed by ; and hold. ibound by this guarantee and endorsement, the 

same as though such note were not executed under seal. 



j8g 



It often happens that it is of mutual advantage to pledge 
" collateral securities " (stocks, bonds, or mortgages) for the 



SALES OF COMMERCIAL CREDIT 



123 



payment of a loan instead of asking personal security or 
executing a mortgage. This is done by offering a regular 

promissory note, to which a contract is added 
nfu^^^^^ setting forth the "securities" delivered and the 

conditions attached to their delivery. The one 
granting the loan will hold these securities subject to the 
agreement. In case the contract for payment is not ful- 
filled, the contract of security may be relied on and strictly 




; g"| ; ■;; I s - -n u s I & 
2 § s E -2 I I § f^ ^ e, e 

2 °- ^ y II -S J 4 "^ 11 o 
n >,-"-^ 2 Pic G-° >^m a 

- J^ .S g, 2i I •« a.-C s S.rt >. 

9 ! Tg 1 5 ^ s " 5 5 ; - 



•O i: t; 4) " 



^:> 




o. c « o qNa — -2 "" c -j: 
-g I I f 2 5 i2 2 I i " I ' 




12i HOW FUNDS ARE OBTAINED 

enforced. These contracts of collateral lien security liave 
many forms. The one above given, it will be noticed, 
authorizes and empowers "the holder of this promissory 
note (provided the same is not paid at maturity) to sell at 
auction or private sale, and transfer, without further refer- 
ence or notice," to the maker of the note, " and apply the 
proceeds in payment " of the note, " together with interest 
charges incurred thereon." Provision is also made for the 
disposition of the surplus. This contract, together with the 
property on which it constitutes a lien, serves as security to 
the purchaser of the credit promise and thereby increases its 
value. It enables the seller of credit to obtain a higher 
price for it in the market. 

The accompanying form of note was largely used by 
banks making call-loans to customers during the time that the 
Ilemoran- stamp revenue act was in force. It was thought 
dum coiled- to contain no promise, therefore to avoid the 

no e. necessity of paying the stamp-tax imposed on 
promissory notes. In form it is simply a memorandum 
made by the cashier to the effect that the bank had advanced 

The Bank, Pa. 

Has this day of _ advanced to 



Dollars, collaterally secured, being entitled to demand a 

return of the said amount, with interest at the rate of.,_ _ per cent, per annum, 

on demand. Collaterals deposited herewith listed on back of this note. 



a certain amount of funds to the customer for which cer- 
tain collateral had been deposited. The memorandum was 
then mcarked " O. K." or " Correct " by the customer over 
his signature. This constituted an "account settled," and 
was enforceable at law as an instrument of collection. Had 
the revenue officers brought this form of instrument before 



SALES OF COMMEECIAL CREDIT 125 

the courts it is liiglilj probable that for the purposes of the 

act it would have been declared an evasion of the tax. 

Added to the ordinary form of note of promise for the 

future delivery of money is often found a clause in the na- 

-r , , ture of a confession of iuderment for the prin- 
Judgment , . t • i /• • 

note. cipal amount, with interest, and cost ot suit. 



$250.= Jacksboro, Tennessee, May 1, 1897. 

One year after date, for value received, I promise to 
pay to Jonas Greer, or bearer. Two Hundred Fifty Dol- 
lars, with interest, without defalcation or stay of judg- 
ment. And I do hereby confess judgment for the above 
sum, with interest and cost of suit, a release of all errors 
and waiver of all rights to inquisition and appeal, and to 
the benefit of all laws exempting property, real or per- 
sonal, from levy and sale. 73^^^^ tt . t^ 

' •' Peter Van Dyke. 



Another form of judgment note is one authorizing 
some one to act as attorney for the maker— to appear and 
-r , ^ " confess judgment for the amount due in case 

Judgment r? n i^ i mi re c T • 

note with 01 deiault. 1 he eirect of this contract is to 

power of allow the holder, at anv time after the note is 
attorney. • i " i . 

due, to enter judgment and to seize upon any 

property of the debtor by process of execution, thus secur- 
ing a lien upon any and all property found that may be 



$M00^ S^^yM^i^^ 3^^.^.d'.r-=:. 

^J^Ay^T^l^Mdc ,aJ^-ci(a.L^^ ■■^^^■td^ ^ ^^ A 



^ ^ HOME NftTlONflL BANK oi Royerstord, Pa. 




100 

WITHOUT DEFALCATION. VALUE RECEIVED; And do hereby nutliorl74:«ny AUorney of tbi.« County, or any other County In tolj Slate or 
Slny uf execution. and do wiiu-e the ngbl and tH:ot:ritofiiny la\v of thl9 or any otner Siaic. exempting properly, reftj or personal. 



126 HOW FUNDS ARE OBTAINED 

necessary to satisfy the amount of the contract. It is a very 
severe form of agreement by way of security, and some States 
on this account have made it illegal for reasons of public pol- 
icy. The following form is unusual in that it combines a con- 
tract of collateral security with one giving power to enter judg- 
ment without action for any deficiency on sale of collateral. 






to t^ (^u/ei / /Kc./C^T^ "T^^^^^cA 

..':====^^ ^J^'^ J'A^<>-^^'-:^^r^i-r^cC ^. •> gollars. 

at 7^ . -^1oO-2^^. A^ ^^rrXM.'^ ^v^^^^^'^^^-^^k 

for Value received, without Defalcation. And with the foregoing Obligation J ha^ delivered to said 

■a'^i/<^ di^ /^^^ (^c^^^^^^. 

as collateral security for ihe paymcni of the same on the day it becomes due, which collaterals J hereby authorize and etnpowet the holder of this Pro- 
missoty Note (provided the same be not paid at maturity) to sell and transfer at public or private lale, without further iioiice or reference toTt*^ and to 
apply the proceeds in payment thereof, logeihcr with interest and charges incurred thereon; thereafter, should any deficiency remain unpaid, ^ furthcc 
promise and agree to pay ihe same to the holder hereof on demand. And h do hereby confess judgment for the said sum, with Interest, less the amount 
obtained from any such sale of such collaterals, prior to the entry of record of said judgment, waiving the benefit of all la*s exempting real or person-M property 
from levy and sale, inquisition and condemnation; and should an execution be iyued^ereby agcce that an attorney's comml^ion ot~f/x,yC £. per cent, 
shall be chiirgcd ; and do hereby agree that this Note may be ehtered of record ^j/VnrCtxrV^« ^^" ^^^^ *i^ '*' *^'*' collaterals, or of any ponion 






A promissory note performs a double purpose as a 
funding instrument : (1) It is a form of instrument which 
allows the maker of the note to dispose of his credit in 
exchange for funds. (2) As a contract for the future de- 
livery it is an instrument in the hands of the holder by 
means of which he may obtain funds through sale or 
through payment (the delivery of the funds promised). It 
is this second use that we still have to consider. Payment 
is obtained through presentation, and depends as much on 
the punctuality of the holder as on the punctuality of the 
maker. A note should be presented on the exact day of 
maturity. When made payable at a bank, or at any other 

place, notes must be presented for payment at 
^7r^'a^ment *^^® place named. If no place is specified, a 

note should be presented at the maker's place 
of business or at his residence. The fact that a note is not 
presented on the day of maturity does not affect the obli- 



SALES OF COMMERCIAL CREDIT 127 

gation as between maker and payee ; but unless there is an 
express waiver of rights, the note must be presented upon 
the exact day of maturity if the indorsers and guarantors 
are to be held Hable under these contracts. 

A maker may usually pay a part of his obligation be- 
fore it is due. It often happens that it is not convenient 
to pay the whole amount when due, in which 
vavment ^^^® *^® holder may take a part and grant an 

extension of time on the balance. This is in 
reality a new contract. If a part payment is made, such 
payment should be indorsed on the back of the note. In- 
dorsement of this kind requires no signature ; the usual 
form is, " Keceived on within note," stating the amount 
and date of payment. An ordinary separate receipt does 
not give notice to a purchaser that a payment has been 
made. A receipt indorsed on the back reduces the face of 
the note. Only payment of the obligation in full — i. e., 
payment of the exact amount of money promised — will sat- 
isfy its conditions, unless the payee enters into a new con- 
tract whereby he agrees to accept something else in place of 
the money. For example, suppose the maker's check were 
accepted. Usually, acceptance of a check and the surrender 
of the note constitutes a new agreement whereby the payee 
relinquishes his right to receive the amount of money prom- 
ised ; the consideration for the relinquishment or cancelation 
of the contract is an order on the bank to transfer funds 
from the account of the maker of the check to the one sur- 
rendering the note. Such a settlement is what is called an 
" accord and satisfaction " between the parties. 

If there is a controversy as to the amount to be paid, 
the maker may offer (i. e., he may make a tender of) such 
an amount of money as he may think due. If 
te^ider. ^^^^ ^^ refused, and a court to whom the con- 

troversy is referred decides that the correct 
amount of money has been tendered, the maker will be 
entirely released. If, again, the dispute be with regard to 



128 HOW FUNDS ARE OBTAINED 

the kind of money offered, the maker need onlyu^ffer that 
which by law is made " legal tender " for the payment of 
debts. In the United States gold and silver coins of the 
United States and greenbacks are "legal-tender" money 
for the satisfaction of credit contracts, unless some other 
kind of money is s]3ecified in the agreement ; in such case, 
the kind promised must be delivered if the creditor insists. 
It often happens that there is a failure and refusal on the 
part of the maker to meet his promises. He may have re- 
fused payment because he was unable to secure 
mmUUiote. ^^^ necessary funds ; he may dispute the amount 
claimed on the ground of failure on the part of 
the payee to indorse a part payment already made, or for 
some other reason ; he may seek to avoid his debt. In 
any case, the fact of failure and refusal gives to the payee 
a "right of action" in the courts not only against the 
maker, but also against all " cosigners," " indorsers," and 
"guarantors," to compel them to make payment of the 
money promised and for which they became surety. 



New York, 189 . 

To 

You are hereby notified that a certain note made by 

fori 

in favor of 

elated , and by you indorsed (or guaran- 
teed), was this day presented to 

for payment and payment was refused. 

[Signed] 



The holder of a note which has been indorsed, or the 

payment of which has been guaranteed, must notify the in- 

dorser or guarantor if payment is not made 

Notice of when due. When one becomes surety for the 
non-payment. 

fulfilment of another's credit contract, he is 

entitled to know of the non-payment in order that he may 



SALES OF COMMERCIAL CREDIT 129 

take steps to protect himself. If he receives no notice of 
non-payment he has a right to presume that the contract 
has been met and that he is released from the security. 
On page 128 is the usual form of written notice sent. 

This right to have demand made on the day that the 
note is due and to notice of non-payment, however, may be 
Waiver of waived by indorsers and guarantors at the time 
demand and the contract is entered into. " Call-loan " notes 
no ice. ^^^ many of the " short-time " notes taken by 

banks very commonly have a clause in the instrument of 
this kind. The law simply protects the indorser in case he 
does not sign away his rights. When waiver is made the 
contract may be strictly enforced by a hona-Jicle holder. 



$500. LoGANSPORT, Indiana, June 30, 1897. 

We, or either of us, promise to pay to the order of 
John Hartwell Bates, on July 30, 1897, the sum of Five 
Hundred Dollars, with interest at the rate of 6^ from 
date, for value received. 

And the cosigners and guarantors of the above note 
hereby severally and specifically waive all rights and ex- 
emptions that would accrue, for failure of the holder to 
present this note for payment when due, for notice of 
non-payment, notice of protest and of demand upon them 
for payments, in case this waiver and exemption had not 
been specifically made. ^ouis Stranger. 

Peter Longfellow. 
Jqhk E. Crakdall. 



An indorsed or guaranteed note which is presented for 
payment outside of the jurisdiction in which it is made, and 
is not paid, is w^woWj protested', this is done to 
give formal evidence that the note was present- 
ed for payment and that payment was refused. Protest 
is a formal declaration made by a notary public into whose 



130 HOW FUNDS ARE OBTAINED 

hands a note has been placed for official and formal presen- 
tation, together with a formal record of the fact bj the 
notary. The notary usually attaches the certificate of pro- 
test to the note ; he may also mark upon the face of the 
note the fact of its dishonor. When a note is sent to a 
bank or other agent for presentation and collection, the 
greatest precaution must be taken before protest ; the bank 



^ H -CL^<*,__/^i^!Ori,,£Z^:Ci^ after date^.JiJ:.^.promise to 

Pay to the ard^ ^.J!!^:Sa*5?!3fc*^^_,jL^^ 

THE Mt NiTIOmBANK OF BETHLEHEM, 

ivithtnit de/al af^ ontfbr value received. 




or other agent should never have it put into the hands of 
a notary for official presentation and protest until it is made 
certain that the non-payment has not occurred through 
mistake ; usually a messenger will be sent out with the note 

/f n A Philadelphia, /^i^ /"l.^. 190/ 

At the request of the Holder, 

^be Centennial IRatfonal ffianh 

J, the undersigned, Notary Public for the Commonwealth of Penna. 

have this day protested a ZcCT^ ^ ^or $JQ0.O* ^ 

dated^.^2r<<.^../^..„.a90/, drawn by .../OI^STr^^ 

(the same being due, demanded and refused), and you as endorser, will 
be looked to for payment, of which you hereby have notice. 

D. S. LINDSAY. Real Estate Broker. 

jSr-Please notify the other parties No. 14 South Broad Street 

to the maker to make formal demand before turning it over 
to a notary, even though the note is made payable at the 



SALES OF COMMERCIAL CREDIT 131 

bank. For self -protection, banks make it a rule to protest 
all paper received from another State for collection wbich 
is not paid when dne, unless ordered not to do so by the 

T~\ e T TMT>C A \7- i NOTARY PUB C, ) No. 14 South Broad Street, 

U. O. LjiiNjJoAl, 1 RE-AL EST..TE oROKER, f Rothsatijld Building. 

iCOPY) 

^■u^ yy cvctt (i/^ ^^ '^A'^^c^-^'/c^-^ 



HE IT KNOWN, That on the day of the date hereof, at the request of THE CENTENNIAL 
NAT. BANK, the holder of the original A©'^ . of which a true copy is above writlen, I, the 

undersigned, Notary Putlic-far the Commonwealth of Pennsylvania, by lawful authority duly commissioned by 
the Governor of Penna., and sworn, residing in the '.City of Philadelphia, during the usual hours of 



business for such purposes, caused the same to be presented at ?fu^yU>& OuUl<r^^^ /^CLuX 
and demand made for the payment thereof, which was refused and answer made 

Whereupon, I, the said Notary, at the request- aforesaid, have Protested, and do hereby solemnly 
Protest, against all per*)ns and everj' party concerned therein, whether as Maker. Drawer, Drawee, Acceptor, 
Payer, Endorser, Guarantee, Surety, or otherwise howsoever against whom it is proper to protest, for all Ex- 
change, Re-exchange, Costs, Damages and Interest suffered and to be suffered for watit of payment thereof: — Of 
which'demand and refusal I have duly notified the parties interested. 

Thus done and Protested aX the City of Philadelphia, 
the JJ^ dayof A<^ tfCf 







B-4. 




Notary Fup 



owner ; one wishing not to have protest made should in- 
struct the bank to that effect. Such instructions are com- 
monly attached to the left end of a note-form, with the in- 



10 



132 HOW FUNDS ARE OBTAINED 

junction that the instruction is to be clipped off before 

presentation. 

It will be observed that the notice of protest is sent out 

by the notary public, to the maker of the note and to each 

of its indorsers and guarantors, making formal 

Notice of ^^^ o^Qml demand. The form of notice used 
protest. . , . . . .„. 

m r^ennsylvania is given on page 131. 

All forms of credit are contracts for the future delivery 
of money which have been " sold " or exchanged for some- 
Advantages thing else of value. That which is received in 
and disad- exchange or " paid " for a credit contract is 
iLsi7ig prom- called the " consideration " or price. A prom- 
issory notes, iggory note, as a form of credit contract, has the 
advantage of being a formal agreement expressed in writing 
and signed by the party making it, as well as by the ones in- 
dorsing or guaranteeing it. It is therefore less likely to 
be disputed, and more likely to be complied with than is a 
simple verbal promise, for which there is no written evi- 
dence, or a memorandum of account made by the creditor 
and not signed by the promisor. Being a written agree- 
ment also, it may be protested ; such public dishonor is 
likely to injure the credit of the maker and cause his future 
offers of credit to be less salable ; on this account the 
maker will usually be more prompt. Tlie disadvantages of 
a promissory note are found in the fact that delivery may 
not be enforced till the note is due. The only way that 
the holder can obtain funds on a note not due is to sell it 
again. When it does come due the maker of the contract 
may have sold everything that he owns and thus have de- 
feated the enforcement of the contract. An open account, 
on the other hand, is due at any time. An overdue note 
(although dishonored) may be a better form of paper for 
the holder to obtain funds with than a note not due, be- 
cause action for collection on an overdue note may be begun 
at once. But a note that has been acquired after it is due 
is not a safe investment ; the one holding it can not raise 



SALES OF COMMERCIAL CREDIT 133 

the plea of "innocent purchaser" against any defense which 
the maker might have raised against the payee if it had re- 
mained in his hands. Suppose, for example, that the maker 
had made part payment, and the holder, failing to indorse 
the amount, sold it after maturity without knowledge on 
the part of the purchaser that a part of the amount had been 
paid. In such case the maker would be allowed to set up 
the payment as a defense in liquidation of the amount. 

Instruments foe the Collection of Credit Accounts 

The commercial account has already been discussed in 
its character 2i^ funds — i. e., as a form of credit used for the 
purj^ose of making purchases and payments. The promis- 
sory note, on the other hand, has been treated as a form of 
credit used to obtain funds. Both are evidences of contracts 
for the future delivery of money. The first contract, how- 
ever, is one for which there is no evidence except the mem- 
oranda or memory of the parties, while the second is evi- 
denced by a writing setting out the contract in full, signed 
by the party obligated. The promissory note, therefore, as 
has already been observed, serves a double purpose : (1) by 
its original sale the maker- was able to obtain funds for his 
immediate use ; and (2) the note being a signed and formal- 
ly executed statement, it may be presented to the maker 
for payment ; it thereby saves the payee for funding pur- 
poses by resale or by collection under the contract when 
it comes due. To restate the difference : The conimercial 
account has for its end the purpose of serving its maker as 
"funds" — as means of purchase or payment; the prom- 
issory note performs the double service of obtaining 
funds for present use for its maker, and that of obtain- 
ing funds for future use for the payee. The commercial 
account, however, being a contract for the future delivery 
of money, must have some form of expression of this side of 
the agreement. There is no written evidence of the con- 
tract for payment or future delivery. In exchange for it 



134 



HOW FUNDS ARE OBTAINED 



goods are given ; how will the one who has given goods for 
this form of credit obtain money in payment under the con- 
tract ? This has given rise to a whole class of instruments 
of collection. 

The most common instrument of collection is the account 
stated. This is simply a copy of the memorandum, or a 
statement from memory, of the items of credit 
stated ^^^ amount received in exchange. This state- 

ment is presented to the purchaser for pay- 
ment. It thus becomes an instrument in the hands of the 
one receiving the credit, which is used to obtain funds in 
payment of the credit given in exchange and for which 
there is no other evidence. After an "account stated " has 
been presented for payment, if no objection is made to the 
items of credit contained in it, it is taken for granted that 
the party receiving the statement accepts it as correct. 



Mr. Joseph Gkaysoi^ New York, July 1, 1897. 
To John E. Black, 
Dealer in Boots, Shoes, and Gents' Furnishings. T)t, 


1897. 
June 

!.<. 

u 
u 
a 


2 

2 

2 

11 

11 

28 


One pair boys' shoes 


11 
5 
1 
1 

-8 


00 
00 
50 
00 
50 
00 


One pair " Eex " tan boots 

Two neckties 


1 Monarch shirt 


2 pairs black hose 


1 nair trousers 


Total, June account 


$17 


00 



In the above exhibit is a copy of memoranda taken 
by John K. Black in regular course of business with Mr. 
Joseph Grayson. The "account stated," or copy of his 
memorandum, shows that on June 2 Mr. Black received 
$1 of Mr. Grayson's credit for a pair of boys' shoes, 



SALES OP COMMERCIAL CREDIT 



135 



$5 of his credit for a pair of ''Hex" tan boots, $1.50 
of his credit for two neckties, etc. During the month he 
had received, according to his own account, $17 of Mr. 
Grayson's credit in exchange for goods. He now " states " 
the account to Mr. Grayson — i. e., presents a copy of memo- 
randa to him for payment. 

The fact that accounts stated are simply the memoranda 
of one party to the transaction leaves room for question as 

to their accuracy. For example, Mr. Grayson 
feUleT^^ may deny that he gave $8 of his credit for 

the trousers purchased on June 28; he dis- 
putes the account, claiming that he- agreed to pay only 
$7.50. Mr. Black's clerk may recognize the mistake and 
correct the error, thereby reducing the account stated to 
$16.50. But Mr. Grayson prefers to have the account 
stand over for another month before payment of the 
amount acknowledged to be due. To place the account 
stated beyond future controversy, and to show that the 
amount due has been settled or agreed on, Mr. Grayson 
marks on the face of the statement " O. K.," adding his 
initials " J. G." Now the " account stated " takes the form 
of a written contract for payment of $16.50. At the be- 
ginning of the next month Mr. Black renders a new state- 
ment of account, in which he enters the amount agreed on 
as balance due as " balance as per account stated," adding 
the amounts of credit purchases subsequent to July 1. In 



Mr. Joseph Geaysoi^" New York, August 1, 1897. 
To JoHN^ R. Black, 
Dealer in Boots, Shoes, and Gents' Furnishings. Dr. 


July 


1 
14 
14 


Balance as per account stated. 
1 suit of clothes 


$16 

30 

5 


50 
00 
00 


1 Knox hat 

Amount due August 1 . . . 


$51 


50 



136 



HOW FUNDS ARE OBTAINED 



order to place an account beyond question, and at the same 
time to have it in form of a " settled account," bills may be 
rendered at the time the purchase is made or long before 
the account is due ; the party receiving it will go over the 
items for the purpose of correction, and then return the 
memorandum with a statement that it is correct, or with 
" O. K." marked on its face over the signature of the one 
buying on credit. The account is then in form for col- 
lection when due the same as a promissory note. 



£ Q ^ 

U U CO 

= o . 

u o § 

S 5 ^ 

2! H § 

D 



Philadelphia, January i, \9dJ / 






'zsL'VO'^ flmeriea^ peademy of political ar^d Social Seieijeef^W 

For Annual Dues for year ending December 31, i<)Ol , $5.00, 




Received payment,. 



Trtaiurei, 



Accounts 
paid. 



Accounts may be paid by the tender of the amount of 
money due, or by offer and acceptance of something else, 
as, for example, the acceptance of a " set-off," 
a " draft " for the amount, a " check," or a 
"due-bill." The payment is very commonly 
evidenced by a "receipt," or a written statement of the 
fact of payment received. 

If one has a claim against another who also has a claim 
against him, this claim is called a set-off — that is, something 
to set or cancel off part of his claim.. Under or- 
dinary conditions it is impossible to have a set- 
off against a note not in the hands of the original payee, but 
with mutual .accounts it is the common method of payment. 
A due-bill is a written acknowledgment or evidence of 
a due account. The ordinary form of due-bill is not nego- 
tiable, as it is not made payable " to order." It 
differs from a promissory note in another par- 
ticular, viz., that it may be made payable in merchandise. 



A set-off. 



Due-hills. 



SALES OF COMMERCIAL CREDIT 137 



$51.50. New York, August 1, 1897. 

Upon settlement of account, this day, with John E. 
Black, I acknowledge the sum of Fifty-One Dollars :y%\ 
to be due and owing to him by me. 

Joseph Geayson. 



A commercial draft is an instrument for the collection 
of funds, through a third party, due on account. It is in 

the form of a letter from the person to whom 
drafis^'^^^ an account is due, directed to the party owing 

an account, requesting him to pay the amount 
of the draft to a third person and to charge the same to 
the account of the writer. For example : one Jacob Koss 
has purchased from William Jones $500 worth of merchan- 
dise on account, to be paid on E^ovember 1, 1898. On 
October 30, Lawrence Williams presents an " account 
stated " to William Jones for $300, and demands payment. 
Jones has not the money, but tells Williams that Ross is 
owing him $500 due on IRovember 1. Williams thereupon 
offers to take a draft on Ross for $300 in payment of 
Jones's account to himself (Williams), which is agreed to 
by Jones. He thereupon writes to Ross as follows : 



Springfield, Massachusetts, October 30, 1898. 

To Jacob Ross: 

After November 1, please pay to Lawrence Williams 
Three Hundred Dollars, and charge to the account of 
1300.22: William Joj^es. 



Upon the receipt of this letter, Williams "receipts" the 
account against Jones. He presents the draft to Ross 
and receives payment ; Ross charges the amount to Jones's 
account. It will appear from this that the draft on Ross 
not only serves Williams as an instrument of collection of 



138 HOW FUNDS ARE OBTAINED 

his account against Jones, but it also serves Jones as funds 
for the payment of his account to Williams. This double 
relation is always found in a draft. It is primarily an in- 
strument for the collection of funds in the hands of the 
one receiving it, but it serves the party making the draft 
as funds for the purpose of payment " on account." It 
often happens that a party living, let us say, in Boston, owes 
another party in 'New York. The 'New York party, wish- 
ing to collect the amount due on account from the Boston 
man, will " draw on him " through his bank. The bank's 
correspondent in Boston will present the draft, upon the 
payment of which the amount will be placed to the account 
of the drawer. The 'New York man will be considered as 
having made a payment to his bank " on account " by draw- 
ing on the Boston customer who owes him. 

When a bill or draft is drawn on some one living in a 
foreign country, it is usually drawn in duplicate or tripli- 

„ . ^ .„ cate, so that in case one is lost the other will 
Foreign oills. ' , , ^ , ., . , ., , ^m • 

reach the party to whom it is addressed. I his 

grows out of the increased uncertainty of delivery of a foreign 
bill. In the foreign bill, more clearly than any other, appears 
the true nature of the instrument. Primarily, it is a simple 
request. It is not, when drawn, a credit instrument. Sev- 
eral requests may be made at the same time for the same 
funds. ]^o promise or contract for the delivery of money 
may be found in a draft before it is presented. The whole 
credit quality of a bill depends on " acceptance " — i. e., on 
the undertaking of the one of whom the request is made 
to make payment to the party presenting it. The accom- 
panying exhibit is the " First " of exchange, drawn by the 
Bank of the United States, January 25, 1838. This was 
one of three bills of like " tenor and date," each bearing 
on its face the stamp of its relation and significance. On 
the left end of the exhibit is engraved " First." Each of 
the other two had engraved upon it " Second " and " Third," 
respectively. The Bank of the United States, through 



SALES OF COMMERCIAL CREDIT 



189 



its President, 
JSTicholas Bid 
die, and its cash- 
ier, J. Cowper- 
tliwait, issued 
three bills 
requesting S. 
Laudon, of 
London, to pay 
to M. Kobin- 
son £1,000, and 
charo-e the same 
to the account 
of the drawer. 
This payment 
was requested 
"sixty days af- 
ter sight " of 
the bill first 
presented. The 
"First" was 
presented on 
May 4, nearly 
three months 
after the three 
bills were 
drawn. Dur- 
ing all of this 
time there had 
been no obliga- 
tion on the part 
of Laudon, of 
London, to pay 
the amount. 
On that day, 
however, he 




140 HOW FUNDS ARE OBTAINED 

" sighted " the " First," and wrote on its face his acceptance 
— i. e., S. Laiidon undertook to pay £1,000 to the one pre- 
senting it sixty days hence. The bill at that moment, and 
not till then, became a credit instrument — a promise to pay 
a definite sum of money at a definite time. The " first " 
request having been honored, the acceptance of either the 
" second " or the " third " would have been at the risk of 
the acceptor and not of the drawer, as the request was for 
the payment of £1,000 only and not for £3,000. 

A sight-draft is one requesting payment at the time 
that it is presented. Let us suppose that Louis Borg had 
an account against Patterson & Co., of Phila- 
and drafts cl^lphia. He wishes to pay an account to Peter 
Sterling for $500. He draws on Patterson & 
Co. for the amount payable "at sight." A time-draft is 
one made payable on a certain day, as, for example, "on 
November 1," or a certain length of time after presentation 



$500. Pittsburg, Pennsylvania, January 23, 1899. 

At sight pay to the order of Peter Sterling Five Hun- 
dred Dollars, value received, and charge to the account of 

To Messrs. Patterson & Co., LouiS BoEG. 

Philadelphia. 



for acceptance. It is very common to make a draft payable 
ten days, or thirty days, " after sight." The time of pay- 
ment of the draft is usually governed by the 
conditions of payment of the account for the 
collection of which it is drawn. If a bill of goods were 
payable ten days after delivery, then a draft might be drawn 
and sent at the time that the goods were sent, to be pre- 
sented for acceptance on delivery of the goods, but not pay- 
able till ten days afterward. 

The acceptance of a draft, like the " O. K." of an ac- 
count, makes it a written evidence of debt against the one 
accepting it ; it is then in the nature of a promissory note, 



SALES OP COMMERCIAL CREDIT 141 

to which the drawer becomes the indorser, and the acceptor 
is the principal party to the contract. Acceptance is made 
by writing across tlie face the word " Accepted," together 
with the name of the party accepting. It is usually dated, and 
very often the place where payment will be made is added. 
If the place of payment is not entered, it is payable, like a 
promissory note, at the office of the acceptor. When the 
one on whom the draft is drawn accepts it, he is said to 
" honor " it. If not accepted or paid, it is not more bind- 
ing on him than a letter or oral request would be. His re- 
fusal to honor drafts made for the payment of accounts due, 
however, will injure his credit in the community — i. e., 
make it less salable in the future — and thereby will handi- 
cap him in using credit as capital in his business. 

A draft, before acceptance, is much like a promissory 
note that has been negotiated before it is executed. It is 

taken by the payee, or his assignee, on the faith 
accejjtance or judgment that it will be accepted. This 
cmd payment judgment is based on the contract, or contracts, 

of security that go with and are attached to or 
made a part of the bill at the time that it is drawn. As in 
the case of the promissory note, the contracts of security 
are of two kinds, viz., (1) personal security and (2) lien 
security. Unlike the promissory note, however, the con- 
tracts of security are for both acceptance and iov payment. 
In the first place, the drawer enters into a contract (not 
written, but understood and enforced by law) at the time 
that the bill is drawn by which he guarantees that the 
drawer will both accept it and pay the amount when due. 
To this may be added still other personal security by " in- 
dorsement " or " guarantee." But since the bill is negoti- 
ated and enters the channels of trade before the credit con- 
tract has been executed, since it is offered for discount and 
exchange in a foreign land, personal security may not be 
considered sufficient. A foreign exchange house will usually 
require that collateral or lien security be added to the con- 



14:2 



HOW FUNDS ARE OBTAINED 



tracts of personal securities. These collateral contracts may 
be offered as security for acceptance only, or, as in case of 
" sight- drafts," for both " acceptance " and " payment." 




■p -p 

CO CO 



SALES OF COMMERCIAL CREDIT 143 

A draft thus secured is called a "documented bill." 
The exhibit here offered is of such a bill " secured of ex- 



SbippeJ), In appateflt (food order B^cona.tlon t ^jt-lsty'. ^-^•yiAjU^£l,^^^Ilj2i^'^'^Ma.xi.ot 

the PAUAMA RAO. ROAD Steamer CsJ, '•^l.-6•^^ - - _ _ Or any of the Company'* 

Steamers, or Steamer employed by said Compan*; n j» lrl6g In thf J'ort of New York, and bound for Colon, V % C ,— To say 









y a "^-'-^'^ ^ 



(CdntentB unki 



irrled upon i 
leave to tow And asRist vflssels iu distreas; to8afl with or without PUots; to tr.\ii9hjp ! 
employed by or connected wtth thom, to lighter from St«Hmer to Steamer^ and from Steamer to shore, and to touch at Port or Port«)» unto 
the Port of Colon (the restraSnt3 ot governments, acts of God, enemies, sweatlnsf. beat of holds, vermin, rain or spray, nor barratrj*. fir- 
at eea or In port, disa^tetB or dangers of the seits. or of sail or steam navigation, of what nature or kind soever excepted); there to I 
dell^-ered to the Agent ot the PANAMA RAILROAD COMPAyY. for transportation to the Port of Panama, and from theneo tbeioR lUrh 
ered at the risk of shippers) by steamer or Steamers of_thc PACIFIC STBASi NAVIGATION COMPANX, and or SOUTH AMKRlCA 
STKAMSHXP CilMPANY o^- Steamer efiipioyed iiy,cither Of the said Companies, with the like exceptions, privileges and eiemptions unl 

the PoRT>j^^,./../^.u<^^C.w . - ^^,.^--^:.^,M--^-'''"C'<^^ . and there in like apparcat good order and condition, to be deliver* 



e ^0Kta9-^„t./j^/:^t^^^ . . „,..„^^....a'r- ^--X-C^^ . and there in Hko apparent g 

bis or l^.U- asaigns, freighl for the- same at t-aUs m pcr4naTvin, tn lit ipai^ in New Tork in Dnltcd StSt 



for the same at f-fl(€8 as pernnaTvin^ to l>e paid in Nao Torh in Dnltcd StStes Gold Coin. 

earned, vessel or cargo loat or jjot lost ; and on the happening of any of the above-«xcepted contingendea, 

the said Steamship CorapanSea are to have the right to forward the above-mentioned. packages to the ports of <«— ■- '^— - '■>---■ -....^ 

and shall receive extra compensation for such service, whether performed bj- 1' ' ......... 

8ervic«3 rendered to afore&aid merchandL«c or tteas.ure, dmlog the voyage, by v 
paid for as fully as If such salving vessel or vessels laelong to ttt'-angere. 

It te expressly understood that the articles named in this Bill of lAding shall be taken from alongside (at ship's tacfeJes op gangways) i 
the consignee immediately after the vessel is ready tto discharge^ or othenr^se they may be landed at the expense and risk of the o*ner, shipp 



These Companies wiU :not be responsible for AXT DAMAGES to goods In BALES. 

BtTTTBR, I<ARI>, OILS. TALLOW, &c.— The Compani^ raentionetl in this Bill of Lading wiii not be responelbie for loee In weight, 
bv leakage or damage incident to the transportation of Sutter, Lard» Oils and Tallow, Sec., or similar goods in Steamers and through tropical 



shrinkage. rusU loss or damu^ from insecurity of pacicasres, inaccuracy or oralssionlu marks or desciliptions, 6ff<icta of climate 

sweating, heat of holds, vermin, rain or spray, nor for articles perishable in their nature, or from unavoidable detention or ' '" " 

ante* will not become liable for any value exceeding one hondred dollars ($100.) upon each of the above-named pacltages. 



It is expressly understood that the CompAiU<« mentioned in this BlU of LaAloe are not accountable for weight, leakage* breakage, 

)ray, nor for articles perishable" in their nal 

e liable for anv' * "' 

is so expressed 1; 

It is expressly stipulated that a delivery on the wharf at the'Port of Panama, of the goods and merchandise mentioned in this BlU 
of Lading.*accord!ngto the terms thereof, to the PACIFIC STKAM NAVIGATION COMPANY, and or SOUTH AMERICAN STKAH- 
«H]P COMPANY, siiall absolve thePANA^LA BAIL BOAD COMPANY from all claims or llabUitles whatever. 

Th* PANAMA BAIL BOAU COWTPANY will not be responsible for loss or damage to goods from Are in cftra, in warehouse or on wharf. 



tlafurlhcr stipulated and agreed, that Ves5>el8 are warranted seaworthy on^' so far as due oareinthe app 
;ui»eriutendenta. Pilots, Masters, Officers, Engineers and Crew can secure It; and the Comimnies mentioned I 
bio for losrt. detention or damaires arisinsr directly or indirectly from latent defects in boilers, machineri'. o 
all reasonable i 

A nd It Is further stipulated, that in all cases of loss of snch goods and merchandise, the amount of claim and damage shall be restricted to 
the cash \ alue of sucti goods or merchandise, at the port of shipment, at the time ol shipment; and that aii claims for partial loss or damage 
shall be ascertained and adjusted upon the same basis of value 
for detention at ports of transhiprnpnt. 
In case of the blockade or Interd ^ct of the port of dcU^'ery . or if, without snob blockade or Interdlet, the onteriuir of the port should 
be considered by the Master unsafe by reason of dl«ea»t«, war oar dtsturbaac«R, be i» to have the option of landing i he goods at any other 
port which he may consider safe, at shipper's expense and risk, and in sQch case the receipt of the Custom flquee or other port autbortties to' 
be accepted by the owners or consignees as a legal and thorough eaneeUing of this Bill of Lading- All quarantined exponae incurred upon 
the goods, of whatsoever nature and idnd, to be paid by shippers or consignees of the goods. 
In all cases the ship's responsibility is to cease when goods have left the ship's deck. 

Shippers of the goods named in this Rill of Lading must comply with all Consular Regulations for Manife»t«, Ihrolces, Oertiilcatea* ete.; 
and any tine Imposed by Authorities at port of Destination, or dftmage rcsultinu: from the failure in this respect, or for Bn-Ors pr Omasiona 
therein, shall be at risk and expense ot the consignees of Goods, and shall be paid by them. 

The 8 lid Goods or Merchandise are shipped and received upon tl>e conditions of the stipulatiotta and prov^onsheteinbefope expressed, 
the undersigned undertaking m behalf of the said partly severally, and to tho extent only, of the liabilities tverelostated to l>e assumed by- 
each of them respectively. ^/ 

In TKHitnCSS ISIlbCrCOf, the A^ent of said steamer harh ^iyoed. .^--^■^^;!^^:S^„....BI1J« of Lading, all of thl» 
tenor and date, one whereof being acijopapllshedy^e jj;fber8 are to stand void. j '^^1*'''^ 

Dat«d at New York, Ihi^ jf^.'X^^^:^S:tCi^. dn/j of . - / /^l^..^^,^ __ *§^_^..i2- 



NAMA RAIX ROAD COMPANY. 
■TBAM .\ AVIGATION COMPANY, 
^MEKlfJAN STEAMSHIP COMPANr, 



change," drawn by Burnham, Williams & Co., of Phila- 
delphia, on the Peruvian Corporation, Ltd. The Baldwin 

Locomotive Works had sold a consignment of 
metded'biU machinery to the Peruvian Corporation. At 

the time the goods were shipped, invoices were 
taken to the office of the Panama Railroad Co., and bills of 



< 

0' 



\% 


^ 


5s ^a' 


^ 




I 



A 



\\' 



IVNiOlHO 




•30N^ 



SALES OF COMMERCIAL CREDIT 



145 



lading were taken 
out bj Burnbam, 
Wilbams & Co. 
in favor of tbem- 
selves — i. e., tbej 
sbipped tbe con- 
signment by the 
steamer Orizaba to 
their own order, 
and had five copies 
of the bill of la- 
ding made out. At 
the same time du- 
plicate ninety-day 
drafts were drawn, 
and an insurance 
policy was jjur- 
chased from Lloyds 
to protect the prop- 
erty against loss. 
These — the in- 
voices, the bills of 
lading, the insur- 
ance policy, and 
the two drafts — 
were taken to 
Brown Brothers & 
Co. for discount. 
Satisfactory ar- 
rangements having 
been made for the 
sale of the bills, 
Burnham, Wil- 
liams & Co. in- 
dorsed and assigned 
them all over to 




146 HOW FUNDS ARE OBTAINED 

Brown Brothers & Co. ; that is, they executed a contract or 
bill of sale to Brown Brothers & Co., with instructions " that 
if the said bill be accepted, the bills of lading are to be given 
up to the Peruvian Corporation, Ltd., without prejudice," 
but " if the Peruvian Corporation, Ltd., declines to accept," 
then Brown Brothers & Co. were authorized to retain the 



^Jr 



// .> X/^ ^ //:/ r ^yy MAY_9-1902^ ^,^_ 

^C'V^ 7j,//,„ J?r^^ *^ ^^qf^—i' y^Ay MAY 9 -1902 

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bill of lading and to place the said material at any time 
in- the hands of their brokers for sale at their discretion, 
and to charge all expenses, including commissions for sale 
and guaranty, and to apply the proceeds on or toward pay- 
ment of the draft for account of whom it may concern. In 
negotiating a documented bill, it is necessary that all copies 
of drafts and documents be turned over to the party buying 
it, otherwise a stranger having duplicates might forestall 
the owner and defraud the parties in interest. It is to be 
noted that the collatei-al here given was in the nature of 
security for " acceptance," only. After acceptance, the 
only contracts remaining were the credit contract, or prom- 
ise to pay on the part of the Peruvian Corporation, Ltd., 
and the personal security of Burnham, Williams & Co. and 



SALES OF COMMERCIAL CREDIT 147 

their indorsers for payment of the credit contract ninety 
days after acceptance. 

The indorsements and other collateral contracts of se- 
curity attached to drafts make these instruments of high 
e . r. commercial value. In the negotiating of for- 

drafts used eign bills, such precautions are taken that one 
as funds. house doing several millions of this kind of 
business per annum has the phenomenal record of having 
lost only $600 during forty years of dealing. By sale of 
his draft on JSTew York, the St. Louis merchant is en- 
abled to obtain funds with which to pay for grain sold. 
On receipt of the grain by the I^ew York merchant, he 
may at once trans-ship it to a Liverpool customer, and on 
his bills of lading draw for the amount. By sale of this he 
obtains funds with which to meet the St. Louis draft. The 
Liverpool merchant meets the draft on him by drawing on 
a Belfast brewer, who settles the draft on him by a bill on 
a ^ew York importer of Irish stout. These international 
drafts or bills are settled by setting one off against another. 
Americans having accounts to meet in London, buy drafts 
against England, and Englishmen having American ac- 
counts to meet will buy drafts against 'New York. These 
secured bills, in their capacity as instruments for the col- 
lection of funds due " on account," come to serve in the 
capacity of funds for the payment of other accounts and 
avoid the necessity of shipping money from place to place 
in payment of credit obligations. 

Drafts which are not paid at the time for which accept- 
ance is made, or which are not accepted, may be protested. 

^r In fact, this is the usual custom when instruc- 

Jy on-pay- , ' ^ 

ment and tions are not given to the contrary. The pro- 
protest. ^gg^ ^£ ^ l^lll p^^^g ^^ i^g j^^^g notice of its dis- 

honor, and thereafter it ceases to serve as funds. No one 
will receive it in payment. It will be returned to the party 
drawing it, and he will be required to make good the amount, 
and pay all costs and expenses. When the drawer does not 
11 



148 HOW FUNDS ARE OBTAINED 

wish to incur the expense of protest, he will have printed 
or attached to the end of the draft a detachable sKp with 
the words, ^^ No protest. Tear this off hefore presenting^ 
This is in the nature of private advice to one presenting. 
Except as between the most reputable houses, such drafts 
are not taken as readily in exchange for the reason that the 
very instruction itself may cast suspicion on the value of 
the paper. 



CHAPTER YIII 

FUNDS OBTAINED BY SALES OF LONG-TIME PAPER 

The credit instruments thus far described are those 
commonly used as a means of obtaining funds for current 
use— i. e., for commercial transactions ; they are generally 
referred to as short-time or commercial paper. When funds 
are desired for more permanent use quite a different ar- 
rangement must be made. Instead of the credit being due 
on demand, or in thirty, sixty, or ninety days, it is made 
payable in five, ten, twenty, or perhaps fifty -years. This 
precludes the use of accounts ; it makes necessary a definite 
or formal, written contract — one which will place the terms 
and amount promised beyond all question. In form, all 
the instruments used for long-time credit transactions are 
in the nature of promissory notes. The credit contract 
itself does not differ from the commercial note except as to 
time of maturity ; the essential difference between long- 
time and short-time paper is found in the contract of 
security given. One can make a conservative business 
Form of judgment of the value of a promise to deliver 
long-time money thirty or sixty days hence ; in this the 
^' ^ ^ * personal ability of the one offering his credit 

for sale to obtain funds with which to redeem it, and ques- 
tions of integrity, can be determined with practical cer- 
tainty. The incidents and accidents of life, and the shifting 
fortunes of business, however, make uncertain all judgments 
of personal condition to deliver funds twenty years hence ; 
judgment as to the value of a contract for the dehvery of 

149 



150 HOW FUNDS ARE OBTAINED 

money twenty years hence, one whicli rests on personal 
ability and integrity alone, must be unfavorable. The credit 
contract in itself would be little valued ; tlie one to whom 
it was offered in exchange for funds would refuse to buy it. 
A contract of security is added. Uncertainty being thus 
obviated, the long-time credit may be sold. 

To illustrate the different characters and uses of long- 
and short-time credit : Edward Strong and Leonard Wil- 

niustrations ^^^^^ ^^^^^^ *^ engage as partners in a general 
of diference grocery business at West Point, on the Hudson. 
tsIs7flong^ Each has $1,000 to put into the enterprise. 
and short- This will give the firm $2,000 as cash, capital. 
time paper, jg^^ they have no stock; they have no store 
building, no office fixtures, no counters or shelves, and no 
provision made for service. Besides, they estimate, a stock 
worth $2,000 would be too small a one to give profitable 
employment to themselves or to their capital. They need 
a stock of goods that will cost from $3,000 to $5,000, a 
building, and other business equipment. How shall they 
obtain the funds ? By consultation with the West Point 
National Bank they find that funds may be obtained there 
to finance their stock purchases ; an arrangement is made 
through the president and cashier of the bank whereby the 
grocers are to keep their account with them, and, on bills 
being presented for stock purchases, Strong & Williams 
will execute their promissory notes, the bank to give the 
firm a credit on its books in exchange for stock notes to 
an amount not to exceed $5,000, as occasion rnay require. 
As a part of the agreement, the grocery company is to 
"deposit" all cash received from customers — all money 
and checks received from sales as fast as they are made. 
This arrangement will enable Strong & WiUiams to buy 
for cash, and to take advantage of the trade discounts 
offered by the wholesale house. The notes are to be made 
payable on or before ninety days, for the reason that it 
is estimated that the stock will be turned over, or sold, 



SALES OF LONG-TIME PAPER 161 

once every three months. In such a transaction the bank 
requires no secitrity ; it is willing to rely on the integrity 
of the partners and their ability to make payments out of 
sales — in other words, it is willing to rely on their unse- 
cured credit. Strong & Williams now have established 
a line of credit good for $5,000 for stock purchases, and, 
besides, they have their original $2,000 for working capital. 
But how about a building and other equipment ? A well- 
located store-room is found which they may rent at $50 per 
month — $600 per year. Just across the street is a vacant 
lot, however, which may be purchased for $1,000. If they 
buy this vacant lot instead of renting the store-room, they 
can put up a suitable oiie-story building for $1,000 more. 
The whole property will cost only $2,000 ; the interest on 
this will be $100 per annum. By such an arrangement 
there will be a clear gain of $500 per year. They decide 
to buy the lot for $1,000, and to spend the other $1,000 of 
the original capital for a building. But having done this 
they have no funds left. To complete their equipment, 
some provision must be made for current funds. Current 
expenses must be paid ; the partners themselves must live ; 
they must pay clerks, delivery, obtain supplies of fuel, meet 
incidental expenses, etc. At least $1,000 more of perma- 
nent capital is required before they are ready to begin 
business. The West Point E^ational Bank is willing to take 
their short-time notes for funds with which to make stock 
purchases, but it is not willing to contribute permanent 
capital — its own business is so organized that it must be able 
to collect funds whenever demands are made by depositors. 
The problem of getting more permanent funds is solved by 
arrangement with the Dime Savings-Bank. This institution 
is willing to give Strong & Williams $1,000 for their note, 
due five years hence, bearing interest at the rate of 4J per 
cent and secured by a mortgage on the building and lot. 
Current funds being provided for in this manner, they take 
the $1,000 received from the sale of the mortgage note, de- 



152 



HOW FUNDS ARE OBTAINED 



posit it in the West Point N^ational Bank, order a $3,000 
stock of groceries in New York, execute ninetj-daj notes 
for this amount, and pay for the goods bv check on their 
account at the bank; they begin business, make payments 
to the bank from sales, and execute new notes for add- 
ing to and enlarging their stock as trade and sales may 
require. 

If we look at the balance-sheet of the Strong-'Williams 
Company on the day that they first received their $3,000 
stock and paid for it, the following financial summary would 
appear : 



BALANCE SHEET, July 1, 1897, 


Assets (or business equip- 


Liabilities (for funds con- 


ment procured by expend- 


tributed). 


iture of the funds contrib- 


By Projjrietors : 


uted). 


Edward Strong . . . $1,000 


Store building and 


Leonard Williams . 1,000 


lot $2,000 


By Creditors: 


Stock 3,000 


The Dime Savings- 


Cash (West Point ]^a- 


Bank, Mortgage 


tional Bank) 1,000 


Loan 1,000 




Loans, West Point 


Total value of assets . $6,000 


l^ational Bank. . 3,000 




Total liabilities.. $6,000 



This gives a picture of the financial arrangement, the 
sources from which $6,000 of funds were procured for the 
enterprise, and the equipment procured by the use of these 
funds. From this, it appears that $2,000 were contributed 
by the proprietors themselves, while $4,000 came from the 
creditors of the concern. Of the credit sold (as a means of 
obtaining these $4,000) that for $3,000 was in the form of 
short-time (commercial) credits, and that for $1,000 was a 
long-time credit contract secured by mortgage. 



SALES OP LONG-TIME PAPER 153 

There are two classes of long-time credits, viz., '•'mort- 
gages " and " hondsP Each class may have the same kind of 
Classes of security, but the first takes its name from the 
long-time contract of security, the second from the char- 
^'^ *"^' acter of the note or credit contract given. It is 

stated that each may have the same kind of security. This 
follows as a necessity from the length of time agreed upon 
for payment. Each requires that the ultimate performance 
of the credit contract be assured, and any security which 
would be sufficient to assure the payment of one form of 
long-time credit obligation would be sufficient for the other. 
The difference in the two classes of instruments arises from 
the advantages of sale of the credit contracts secured, and 
from the form which the credit " issue " takes. "When it is 
desired to have the secured obligation for future delivery of 
money divided into a large number of small credit con- 
tracts, and sold separately, a bond issue will be resorted to ; 
if one party is found who is willing to purchase the whole 
amount secured and hold it in lump sum, or in the form of 
a few large credit contracts, the " mortgage " will be offered. 

Mortgages 

That which commonly goes in the security market as a 
" mortgage " is a misnomer ; it is in reality a credit obliga- 
tion secured by a mortgage. The mortgage is only a part 
of the thing bought and sold ; in fact, if one held only the 
'' mortgage " or security contract it would be of little value. 
The promise for the delivery of money is found in a 
" promissory note " or other evidence of debt. The mort- 
gage is only a collateral contract which gives to the creditor 
a contract of lien on the property named as 
''mortgage''? security for the payment of the contract of 
credit. If there are several credit contracts 
secured by the same mortgage, these may be sold to dif- 
ferent persons, and the one who holds the mortgage will 
be held to be the trustee for them all. When the credit 



154 HOW FUNDS ARE OBTAINED 

contracts are paid the mortgage lias no further validity, and 
may be declared void if action is brought to clear the title 
to the property against which it is given. There is no more 
reason for the secured debt of one individual (or of a part- 
nership,) being called a " mortgage security " than there is 
for the debt of a corporation issuing bonds, except that 
usually the mortgages and credit contracts are kept together. 
The term '' mortgage," however, is sanctioned by commercial 
usage, instead of the descriptive phrase, " a credit contract 



$1,000.22: West Point, New York, June 1, 1897. 

Five years after date we and each of us promise to pay 
to the Dime Savings-Bank of West Point, or order, for 
value received, One Thousand Dollars, with interest pay- 
able annually, on June 1 of each year, at the rate of 4J-^ 
per annum. 

This note is secured by mortgage, of even date here- 
with. Edward Strong. 

Leo]S"ard Williams. 



secured by a mortgage." A mortgage is a contract which 
gives to the one in whose favor it is made the exclusive 
right, on default, to sell the property named in it, as a means 
of procuring funds with which to pay the credit contract 
thus secured. In form, the mortgage is a conveyance of 
property, with the condition that if the debt is paid the 
conveyance is to become void. When stripped of its legal 
phrases it is, in substance, as shown on page 155. 

It will be noted that the contract is one of sale. It is, 
in fact, a deed to the property, and if a regular deed is 
drawn to which the condition of security for payment is 
added, the mortgage will be complete. By making the 
mortgage a conditional sale, and making the sale a matter 
of public record, so that the public may have notice of the 
transaction, Strong & Williams can not sell the property 
to any one else and pass a good title. This guarantees to 



SALES OF LONG-TIME PAPER 155 

This contract witnesseth : That 

Whereas, Edward Strong and Leonard Williams have 
this day executed their promissory note to the Dime Sav- 
ings-Bank of West Point, or order, for the sum of One 
Thousand Dollars, due five years from date, with interest 
at the rate of 4^^ ; 

Now, THEEEFORE, the Said Edward Strong and Leon- 
ard Williams, in consideration of the aforesaid One Thou- 
sand Dollars to them in hand paid, as evidenced by said 
promissory note, and for the securing of the payment of 
the same unto the said Dime Savings-Bank, or its as- 
signs, have sold and conveyed to the said Dime-Savings 
Bank of West Point the following described property, to 
wit : Lot numbered 246, in Block numbered 36, on Lau- 
rel Street, in the Town of West Point, in the State of 
.New York, according to official plate thereof, filed for 
record in the office of the Auditor of the County of Kings, 
in the State of New York. 

The condition of this contract is, that if the said 
Edward Strong and Leonard Williams shall pay to the 
said Dime Savings-Bank, or its assigns, the sum or sums 
promised in said note according to the tenor thereof, then 
this contract shall be null and void, otherwise to remain 
in full force and effect. 

I^ WITNESS WHEREOF wc havc hereunto set our hands 
and seals this 1st day of July, 1897. 

Edward Strong. [Seal] 

Leonard Williams. [Seal] 

.^.. , Lincoln Stetson. 

Witnesses : i ^ , ^ ^ 

John M. Bromley. 



156 HOW FUNDS ARE OBTAINED 

the Dime Savings-Bank the sole power to sell the property 
of Strong & Williams ; it also reserves the property to 
jj- , them as a means of obtaining funds with which 

contracts one to meet their note when due five years hence. 
of sale. rjij^g result is that the Dime Savings-Bank has 

confidence that their long-time note will be paid. They 
can pass a conservative judgment as to its value, and hav- 
ing the payments of principal and interest secured, the bank 
offers to Strong & Williams $1,000 for their contracts, to 
deliver $1,000 ^yq years hence, together with current in- 
terest payments of $45 annually. 

Sometimes a memorandum of credit is included in the 
mortgage itself instead of being in a separate instrument, in 
which case the two obligations may not be separated. The 
laws of some States make a difference in the content of 
such agreements. The laws of the State of Washington, 
for example, provide that when the credit contract is not 
■nj^ , widened by a separate instrument, the creditor 

tvithout sepa- may not collect any deficiency remaining after 
rate note. ^j^^ g^|g ^-f ^^^ property mortgaged. Gener- 
ally speaking, however, the funds derived from a sale of 
the mortgaged premises are to be applied to the payment of 
the " note " ; any amount that remains unpaid is still a 
charge against the maker of the note. 

When one wishing to sell his note has no property of his 

own, he may get a friend to give a mortgage on his property 

. , as security. In this case, one person will execute 

Accommoda- •^ . ' n {> ^ ^ i 

tion mort- the note and receive the benefit of the lands, 

9^9^' while another will execute the mortgage con- 

tract of security. This is the same kind of accommodation 
as the indorsement of another man's note, except that it gives 
to the creditor a lien security instead of a personal one. 

In Pennsylvania, Delaware, and several of the States 
that still follow old English practice, a promissory note is 
seldom used as evidence of the credit contract to which a 
mortgage on real estate is given for security. To illustrate : 



SALES OF LONG-TIME PAPER 166a 

EnotD all Men bg tl)esc presents That i, J.wuuam White, 

of the City of Philadelphia, Contractor (hereinafter called 

the Obligor), am held and firmly bound unto John Doe of the same 
City, Merchafit 

(hereinafter called the Obligee), in the sum of Five T1iousa7id Dollars 
lawful money of the United States of America, to be paid to the said 
Obligee, his certain Attorney, Executors, Administrators or Assigns: 
to which payment well and truly to be made, I do bind and 

oblige myself, my Heirs, Executors and Administrators, all and sirigu- 
lar firmly by these Presents. Sealed with my Seal, dated the First day 
of April in the year of our Lord one thousand nine hundred and three. 
The Coudition of this Obligation is such, That if the above 
bounden Obligor, his Heirs, Executors or Administrators, or any of 
them, shall and do well and truly pay, or cause to be paid unto the 
above-named Obligee, his certain Attorney, Executors, Administrators 
or Assigns, the just sum pf Tivo Thousand Five Ilicndred Dollars 
lawful money as aforesaid, within three years from this date, 

together with interest 

payable half yearly at the rate of six per cent per annum, 

without any 
fraud or further delay; and shall produce to the said Obligee, or his 
Executors, Administrators or Assigns, on or before the first day of 
September of each and every year, receipts for all taxes of the current 
year assessed upon the mortgaged premises ; then the above Obligation 
to be void, or else to be and remain in full force and virtue: ^^'^o^tittie'D, 
however, and it is hereby expressly agreed, that if at any time default 
shall be made in payment of interest as aforesaid, 
for the space of thirty days after any half-yearly payment thereof shall 
fall due, 

or in such production to the Obligee or his Executors, Administrators 
or Assigns, on or before the first day of September of each and every 
year, of such receipts for such taxes of the current year upon the 
premises mortgaged, then and in such case the whole principal debt 
aforesaid, shall, at the option of the said 

Obligee, his Executors, Administrators or Assigns, become due and 
payable immediately, and payment of said principal debt, 

and all interest thereon, may be enforced and recovered 
at once, any thing herein contained to the contrary notwithstanding. 
^ntJ ^.^i^o^ftr^tJ furtt)cr, however, and it is hereby expressly agreed, that 
if at any time hereafter, by reason of any default in payment, either 
of said principal sum at maturity, or of said 

interest, or in production of said receipts for taxes, within the time 
specified, a writ of Fieri Facias is properly issued upon the Judgment 
obtained upon this Obligation, or by virtue of the warrant of attorney 
hereto attached, or a writ of Scire Facias is properly issued upon the 
accompanying Indenture of Mortgage, an attorney's commission for 
collection, viz., five per cent, shall be payable, and shall be recovered 
in addition to all principal and interest then due, besides costs of suit. 

Sealed and Delivered \ D. S. LiNDSAY, J. WiLLIAM White. -j Seal r 

in the presence of us: f Jqn EdWARDS. ^ —. — ' 



156 ^ HOW FUNDS ARE OBTAINED 

Mr. J. William White desires to obtain $2,500, and, as 
security, offers a mortgage on real estate estimated to be 
worth $5,000. Instead of executing a promissory note— an 
unconditional contract for the future delivery of $2,500, 
with interest, etc. — he executes an " indemnity bond," i. e., 
a conditional contract for the payment of $5,000, the con- 
The indemni- ^^^^^^ ^^ which as stated " is such that if the 
ty bond and above bounden obligor, J. William White, his 
mortgage. Jieirs, executors, administrators, or any of them 
shall, and do, well and truly pay or cause to be paid . . . the 
sum of twenty-live hundred dollars," etc. This personal 
contract of guaranty, together with a mortgage on the real 
estate mentioned, will be exchanged for the $2,500. In 
such a transaction there is no writing which sets out the 
contract of credit in detail. Evidence as to the credit con- 
tract is left to the memorandum contained in the indem- 
nity bond and in the mortgage. There are, however, two 
contracts of security for the payment of the credit con- 
tract — (1) a personal contract of security in the form of an 
indemnity bond and (2) a contract of lien security in the 
form of a mortgage. Under such a practice in Pennsyl- 
vania, a creditor may file the indemnity bond with a pro- 
thonotary and obtain a judgment entry before default on 
the credit obligation, and thus establish a lien on all other 
real property owned by the maker. As a result a " straw 
bond " is usually executed in real-estate mortgage transac- 
tions — that is, one who knows the law will usually get some 
one to make the bond who has no property ; he will also pass 
a deed to this " straw man," and then he will execute the 
mortgage. The evils of the law may thus be avoided by the 
more intelligent; it operates as a trap, however, to catch 
the unwary. There is only one explanation for such a lum- 
bering, indirect, and unjust system of credit — viz., a slavish 
following of inherited forms of law and business practice. 

The chattel mortgage pertains to business and properties 
where the chief assets are personalty. A manufacturer 



SALES OF LONG-TIME PAPER 157 

rents his building, mechanical equipment, and power; he 
procures another part of his equipment bj means of capital 

funds, obtained on credit, and gives his promis- 
mortaac/es ^^^T ^^^® f^^' ^^^^ amount. To secure the funds 

needed he gives a mortgage on his products. 
These products are so shifting in nature and mistable in 
value that thej are not usually found in the general security 
market. They are more usually given to banks or local 
investors or to supply houses. They belong to the short- 
time or commercial-paper class rather than to long-time 
credit transactions. 

A farmer owns a piece of unimproved land. He can 
make it productive only by building fences, houses, and 

drains, and by procuring machinery and horses 
mortgages. with which to till the soil. He goes to a loan 

company for the needed funds, offering a 
mortgage on the land as security. Mortgages upon im- 
proved farm property, if properly graduated in amount, 
are safe and profitable investments. The buyer, however, 
must exercise care and judgment. Unimproved land is not 
the best character of security even though the funds are 
used to improve it. The margin of value is usually a small 
one between actual cost of improvement and the selling 
price after the improvement has been made. Should there 
be collusion between the loaning agent and the landowner, 
the money advanced may be largely in excess of the actual 
property value. One of the devices of these enterprising 
companies is to offer their own guarantees as to both prin- 
cipal and interest of all mortgages negotiated by them. 
The investor should be sure of two things : (1) the safety 
of the principal ; (2) regularity in the payment of the in- 
terest. In some portions of the United States there* is 
great danger of default from causes such as drought, floods, 
hail, and violent winds — causes that may not be anticipated 
by the farmer and over which he has no control. This 
makes the income of the farmer uncertain, and often causes 






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SALES OF LONG-TIME PAPER 159 

him to default in his payments. It is a judicious exercise 
of investment judgment not to contribute large capital to 
such an enterprise on credit; it encourages the farmer to 
become encumbered in obhgations which he can not meet, 
and involves the investor in trouble, loss of time, and loss 
of capital. 

Among the best kinds of mortgage securities are those 
held against improved city real estate, but of this class well- 
i>r a located " business property " is usually prefer- 

on " husiness able to residence property. The reason for 
property. ^^^^ ^g ^^^^ business property is a regular and 
necessary part of business equipment, and x^redit promises 
secured by liens on such property become a first claim 
against " net income " of business ; residence property, on 
the other hand, is not used for the purpose of income ; the 
rents which support such investments must come from the 
" net profits " of other business after the expenses, interest, 
taxes, etc., have been paid. Fluctuations in values of resi- 
dence properties are usually greater than those of well- 
located business properties, and they are not as good secu- 
rity on this account. The exercise of proper judgment and 
a sufficient margin of safety may make either class of secu- 
rities equally good ; failure to exercise such judgment may 
make either equally bad. 

Mortgages on mines are peculiar. By utilizing the 
resource against which the mortgage lien is given, and on 
Mortaaaes ^^^i^h the industrial manager must rely for his 
on mines and income — in fact, by pursuing the very object 
Umber lands. £^^ which the capital contribution is obtained — 
the mine becomes exhausted and the security depreciated. 
This must be taken into account in estimating the value of 
the security. Generally speaking, provision should be made 
for a sinking fund — i. e., for annual reduction of the prin- 
cipal loan. Another method of protecting the mortgagee's 
interest is to make the whole principal due within such a 
time as to prevent exhaustion of the property. It is never 



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SALES OF LONG-TIME PAPER 16l 

safe to allow loans of this kind to run twenty or fifty years, 
as is common in some classes of mortgages. 

Mortgage-notes are usually in large amounts — tliey com- 
monly cover the whole sum borrowed, unless there is some 
Parti- advantage in having the principal sum paid at 

mortgage different dates. This may make them difficDlt 
receipt. ^^ transfer, for the reason that the investor may 

not have the amount of the note available ; if available, then 
he may not wish all of his available funds in one property 
or credit instrument. As a means of finding a more ready 
market for mortgages, financial houses have devised what 
is known as a " parti-mortgage receipt." This is a certifi- 
cate of the company holding the mortgage that the holder 
has purchased a fvo-rata interest in the mortgage. Let us 
suppose that a note is given for $100,000, due in ten years, 
secured by mortgage. For convenience of sale, 20 certifi- 
cates of $5,000 each will be issued and sold h^ the com- 
pany taking or holding the original security. These cer- 
tificates of interest in the original mortgage-note are sold, 
and thereafter the company holding the mortgage becomes 
trustee for the holders of certificates (see page 158). 

In further application of this principle the collateral 

certificate has come into use. This is a certificate of in- 

rm 77 4. terest in a number of securities held in trust. 
Tlie collat- * „ , . n . . . , 

eral certifi- A collateral trust IS lormed — i. e., certam col- 

cafe. lateral securities are placed in the hands of a 

trustee. Against this, collateral certificates are issued and 
sold in denominations to suit the demands of the market. 
Both of the above forms of financial instrument bear a 
close resemblance to bonds ; in fact, they may be said to 
be a "cross" between a bond and a mortgage security. 
The form used by E-ufus Coffin & Co. is exhibited on the 
opposite page. A copy of a $25,000 collateral trust certifi- 
cate issued hj the trustees of the American Asphalt Com- 
pany (see page 162) is of special interest in this relation, 
on account of the recent failure of that company. 
13 



162 



HOW FUNDS ARE OiBTAlNED 



Bonds 

Bonds, as credit contracts, are not to be confused in 
thought with bonds as contracts of indemnity. Bonds, as in- 
struments of credit, where negotiable, may differ from prom- 
issory notes only in this, that they are issued in series. For 
example : Mr. Bussell Sage may wish to build a large office 
building in 'New York. Let us say that he owns a lot at 
the corner of Broadway and Fourth Street, which is valued 
at $500,000. The office building that he has planned for 



lH[:< »o<>ooo<x»:-o<>>> :<<<:<ioo ooooo<>x . 



'.atSTooo.:* 



Certificate of Deposit for Collateral 6oId Certificates m 

Depositeii under and in accordance with the provisions of a certain Agreement, dated November 14, 1901, made between 
HENRY W. BIODLE, RUDULPH ELLIS, ALVIN W. KRECH, EFFINGHAM B. MORRIS, and HENRY TATNALL, Coramillee, 
parties of the l^rst part; holders of Collateral Gold Certificates of the Asphalt Company of Amnrica, parties of the 
second part; and the COMMERCIAL TRUST COMP/.NY, of Philadelphia, and THE MERCANTILE TRUST COMPANY, 
of New York, parties of the third part 




it has received ^d^-o-t^^^ 7v^~ 

'.fioates were deposited in trust subject 



The COMMERCIAL TRUST COMPANY hereby certifies that 

Certificates, aggregating $ 2S'ooo-=i*=- — _ .- '. which Certificates were deposited in trusfsubject to 

thk terms of the above described agreement, and subject to the crier of the Committee therein named, 
cr a majority of them, or their successors; and the holier hereof assents and becomes a party to said 
agreement by receiving this Certificate. The holder hereof is entitled to receive all the securities, 
benefits, and advantages coming to the depositor of said Certificates under said agreement 

' The interest represented herein is transferable by delivery of this Certificate, subject to the terms 
and conditions of said agreement. This Certificate may be registered as to ownership, but after registra- 
tion no transfer, except on the books cf registration, shMl be valid, unless the^t transfer be to. bearer, 
when this certificate shall le transferable by delivery as before. 




erection on this site is estimated to cost |1,000,000. He 
has $250,000 in cash, which is available for the purpose. 
How will the remaining $750,000 be obtained ? Mr. Sage 
calculates that by borrowing $750,000, at 4 per cent, the 
income from the rents will be sufficient to pay interest, 
meet all expenses for repairs, depreciation, taxes, etc., give 
to himself a dividend of 5 per cent on the value of the lot 
and $250,000 invested by himself, and leave a surplus suf- 



SALES OF LONG-TIME PAPER 163 

ficient to pay off the $750,000 loan in fifty years. On in- 
quiry, however, he finds that he can not get $750,000 from 
any one person or investment company, No one wishes to 
risk so much on the security of a single property. The 
center of business may change ; the properties adjoining 



$1,000. No. ...... 

I, Eussell Sage, an unmarried man of the City of New 
York, State of New York, for value received, promise to 
pay to the holder of this bond the principal sum of One 
Thousand Dollars, gold coin of the United States, of pres- 
ent weight and fineness, at the office of the Union Trust 
Company of New York, on the first day of January, 1948, 
with interest thereon at the rate of 4^. 

This bond is one of a series of first-mortgage bonds 
issued by the said Eussell Sage amounting in all to the 
sum of Seven Hundred Fifty Thousand Dollars (1750,000), 
all of the same date, for the sum of One Thousand Dol- 
lars each, and each of which is numbered from one (1) 
to seven hundred fifty (750) inclusive, and all of which 
are secured without discrimination or preference by a 
first mortgage duly executed by said Eussell Sage on the 
following property : Lots numbered forty (40) and forty- 
two (42) of Block numbered ninety-six (96), of the City of 
New York, together with the buildings and improvements 
erected thereon, or hereafter to be erected, the same being 
located on the northwest corner of Fourth Street and 
Broadway in the City of New York. .^^^^^^^ g^^^^ 



may come to be used for manufacturing purposes ; many 
changes are possible within fifty years which would cause 
his property to depreciate in value and impair the security 
of the loan. Those persons who make it a business to loan 
money on business property will not invest all their funds 
in one security ; they prefer to invest in a variety of securi- 



164 HOW FUNDS ARE OBTAINED 

ties as a protection against loss. While thej are not willing 
to take the whole amount, thej would gladly invest in a 
portion of the amount if each part were equally well se- 
cured. In order to effect this, he decides to divide the 
loan into 750 parts of $1,000 each, and give to the Union 
Trust Company a mortgage on the property as secur- 
ity for payment of interest and principal. In other 
words, he decides to issue a series of seven hundred and 
fifty first-mortgage notes or bonds, in form the same as 
the bond or note shown on page 163, but numbered 
serially. 

Having executed his bonds and mortgage, Mr. Sage 
places them, together with $250,000 in cash, in the hands 
of the Union Trust Company, under an agree- 
company as Client that they may dispose of the bonds to 
agents of purchasers, and that when the entire issue has 
transfer. been disposed of (not until then) a contract will 

be made for the erection of the building, accord- 
ing to the plans and specifications previously adopted, the 
trust company to have the general supervision of the con- 
struction and of payments. The Mercantile Trust Com- 
pany, as trustee of the Peter Cooper estate, has funds to be 
invested, and after examining the security for the payment 
of the bonds offered by Mr. Sage, it decides to take one of 
them at $1,000. The Mercantile Trust Company therefore 
makes a deposit with the Union Trust Company, for which 
the Union Trust Company gives its receipt in form similar 
to that shown on the opposite page. 

Such a contract protects the purchaser against loss on 
account of faihire to sell the entire issue, while the contract 
of trust which gives to the Union Trust Company the super- 
intendence of the construction and the disbursement of 
funds, amply protects the bondholders' security. When 
the entire issue has been disposed of, the trust company 
will deliver the bonds to respective purchasers, and as a 
result of the bond sale will have $750,000. On page 166 



SALES OF LONG-TIME PAPER 165 

is a copy of a receipt used in the bond sale of the Glen 
Echo Kailroad Company. 



$1,000. New York, November 17, 1897. 

This is to certify that the Union Trust Company has 
received from the Mercantile Trust Company, trustee of 
the Peter Cooper estate, One Thousand Dollars on deposit 
for the purchase of one bond of an issue of Seven Hun- 
dred Fifty, each for the sum of One Thousand Dollars, 
executed by Eussell Sage of New York, and secured by 
mortgage on Lots 40 and 42, Block 96, of the City of 
New York, together with the buildings to be erected 
thereon, to be known as the Sage Block, at the northwest 
corner of Fourth Street and Broadway, which said bonds 
and mortgage, together with a cash deposit of 1250,000 
made by Eussell Sage, are held in trust by the Union 
Trust Company. 

The condition of this deposit is, that if all of the said 
issue shall be sold at par on or before January 1, 1898, 
then the Union Trust Company will deliver to the above- 
named depositor the bond herein contracted for ; but that 
in case the entire issue shall not be so sold, then the said 
deposit may be withdrawn, and in any case, without fur- 
ther authorization, it shall not be applied to the purchase 
herein described and set forth. 

The Uis^ioi^ Trust Company, 

Jacob Fressenden, President. 



The amount received from bond sales, added to the 
$250,000 cash deposit made by Mr. Sage, provides the 
$1,000,000 to be expended in the erection of the 
FZds!"''^ office building, on the disbursement of which 
the lot and structure will stand as security for 
the payment of the bonds. Herewith (page 167) is given a 
copy of bond issued by the Bank of the United States after 



166 



HOW FUNDS ARE OBTAINED 



it was incorporated under the laws of the State of Pennsyl- 
vania. This was an unsecured bond. It had no mortgage or 
other collateral contract to vouchsafe its payment. The pur- 
chaser relied entirely on the credit of the bank. It stands 
on the same basis as an unsecured note, except that the 
issue was in even amounts of £1,000 each, and ran fourteen 
years instead of being made payable in sixty or ninety days. 




The similarity in form of bonds to promissory notes, as 
well as the advantage of serial issue, is illustrated by the first 
mortgage real-estate bonds of the Philadelphia Mortgage 
and Trust Company (page 16S). This company has loan 
offices in different parts of the country. The bond here 
shown is one provided for its Birmingham agent. One 
wishing to obtain $20,000 on improved real estate in Ala- 
bama, will issue 20 bonds or notes in series, each of which is 
a contract for the payment of $1,000. These will be secured 
by a mortgage executed to the Philadelphia Mortgage and 
Trust Company. The Philadelphia company will buy the 
entire issue. It will then hold the mortgage, or assign it in 



SALES OF LONG-TIME PAPER 



16T 



trust to some trust company to be held as security for the pay- 
ment of all, and sell the notes thus secured to customers in 




such numbers or amounts as its customers may desire. This 
arrangement allows the notes to be placed on the market 
and disposed of to better advantage to all parties than if 



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SALES OF LONG-TIME PAPER 169 

the contract for payment were in one instrument. An ex- 
hibit is also shown on page 170 of a form of bond issued by 
Mr. William E. Bailey, of Seattle, Washington, as a means of 
obtaining a part of the funds necessary for the erection of 
an office building in that city known as the Bailey Building. 

The only way that a bond is distinguished from an 
ordinary promissory note is by the fact that it is issued as 
„ , ,. a part of a series of like tenor and amount, 
tinguished and, in most cases, under a common security. 
from notes. jg.^ j,^]^ ^-^ common law the bond is also more 
formal in its execution. The note is a simple promise (in 
any form, so long as a definite promise for the payment of 
money appears upon its face), signed by the party bound, 
without any formality as to witnesses or seal. The bond, 
on the other hand, in its old common-law form, required a 
seal, and had to be witnessed in the same manner as a deed 
or other formal conveyance of property, and though assign- 
able was not negotiable. This is still the rule within many 
jurisdictions. 

The contract of security for the payment of a bond 
issued may be one giving to the holders a lien on property, 
or it may be entirely personal. For example, 
forTmds. ^^e ^^J wish to obtain $100,000. To this end 
one may offer for sale 1,000 bonds for the pay- 
ment of $100 each. If the purchaser or purchasers are not 
content to rely on the unsecured promise of the maker, per- 
sonal security may be added — they may be guaranteed, or, 
when negotiable, indorsed. The security for a bond issue, 
like that of a note, may be found written upon the face or 
back of the bond itself. On the margin of the certificate 
of indebtedness (or bond) of the Ocean Yiew Cemetery 
Company will be found the written guarantee of the Metro- 
politan Land Company, as follows : 

FOR VALUE RECEIVED THE METROPOLITAN LAND COMPANY HEREBY GUARANTEES THE PAYMENTOF 
BOTH PRINCIPAL AND INTEREST ON THIS CERTIFICATE WHEN DUE. NEW YORK, S E PTEMBER 10^" 1901 

METROPOLITAN LAND COMPANY, 

B/..^....„^ „ PBESIOtWX 



SALES OF LONG-TIME PAPER 



171 



This is a personal se- 
curity in the nature of a 
guarantee, which is add- 
ed to the credit contract 
or bond. This particular 
bond also has lien secu- 
rity in the nature of a 
trust deed and a sink- 
ing fund. The contract 
made by the Keading 
Terminal Company, guar- 
anteeing payment of 
Reading Eailroad Com- 
pany bonds issued for 
funds with which to build 
the depot at Philadel- 
phia, is exhibited on this 
page. 

Indorsement of a ne- 
gotiable bond carries 
with it the same signifi- 
cance as indorsement on 
a note. It may, how- 
ever, be qualified by 
writing in any manner 
agreed on by the parties. 
The form of indorsement 
found on the back of the 
bonds taken and sold by 
the Philadelphia Mort- 
gage and Trust Com- 
pany, before referred to 
(page 168), is reproduced 
on page 172. 

When the company 
wishes to assign a bond 







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172 HOW FUNDS ARE OBTAINED 

without being bound as an indorser or guarantor, another 
form of indorsement is used. It may be assigned without 
recourse, or may speeificallj limit its Hability. 

A mortgage security given for the payment of a bond 
issue is usually executed to a trustee — some disinterested 
Trustee of pai*ty who holds the security for the benefit of 
bond secu- all concerned. This becomes necessary from 
^* ^' the fact that the bonds are held by a number 

of persons ; all of them are interested in a common se- 
curity. If one of the bondholders were to hold the mort- 



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gage he might derive an undue advantage over other hold- 
ers. Such an arrangement would deprive a bond issue of 
its special advantage. The rights of all parties are pro- 
tected by making some disinterested person trustee for the 
purpose of holding and administering the security. 



SALES OF LONG-TIME PAPER 173 

Since the trust company has come to be a prominent 
feature of financial hfe, it is the usual thing to liave mort- 
Whomayhe g^g® security of a boi; 1 issue made to such a 
trustee of a company in trust. It is from this class of rela- 
tions that the trust company derives a large 
part of its business. Any one who is capable of receiving 
title to property, however, may become a trustee. It some- 
times happens that one of the bondholders will hold the 
mortgage for himself and all others. This makes him 
responsible as trustee to the other bondholders. 

Yery often stocks, as well as bonds, are called " securi- 
ties." On this account it may be well to distinguish between 
How corpo- corporate shares and corporate bonds. The cor- 
diffe/f^im pc>i*ate share is a certificate of proportionate pro- 
corporate prietary interest in a corporation — that is, it is 
s lares. received in exchange for contributions of funds 

made by a proprietor. The bond, on the other hand, is a 
credit obligation of the company. The stockholder stands 
in much the same relation to a corporation as does a partner 
to an unincorporated company — i. e., he is a joint owner of 
the concern. The bondholder, however, has no interest in 
the company ; he simply holds a contract which binds the 
corporation to pay him a definite sum of money. The 
bondholder usually has some kind of security for the fulfil- 
ment of his contract ; the stockholder has no security, and 
can have none, (1) because his contract is not one for the 
payment of a definite sum of money ; (2) because his income, 
as a proprietor, can be nothing but a share in the divi- 
dends declared out of the profits of the company after the 
payment of all credit demands. 



Definition and Classification of Corporate Bonds 

With reference to the nature of security, corporate bonds 
fall under two classes, each of which has several subdivisions. 
Those which are based on personal security are either 



174 HOW FUNDS ARE OBTAINED 

"guaranteed" bonds or "indorsed" bonds. These have 
Guaranteed ^^^^ discussed and distinguished at such length 
and indorsed that nothing further need be said except to call 
bonds. attention to the fact that they form a part of 

the classification determined bj the nature of the security 
offered. 

The different kinds of bonds based on lien security are 
numerous. Many of these take their names from the charac- 
Bonds hased ^^^ ^^ ^^^® property against which the lien runs. 
on lien Among the most commonly found upon the 

security. market are the following : 

It may happen that a corporation will have large hold- 
ings of real estate which may be separated from its other 
properties. Many of the railroads have received 
londf'^^^^^^ land grants from the Government, and desiring 
to use these lands as a basis for security instead 
of selling them, a separate issue of bonds has been made 
upon the real estate as security. They are called real -estate 
bonds, to distinguish them from the other bonds issued by 
the company having a different kind of lien security to 
assure payment. 

Instead of dividing the property, however, and issuing 
one kind of bonds on the security of one property, and an- 
2 General Other issue on another property, an issue may be 
mortgage made the security for which is a mortgage on 
all of the properties of the corporation. This 
is commonly called a "general mortgage" (page 175). 

If mortgages have already been given on particular parts, 
and subsequently another mortgage is given for the security 
of a new issue covering the whole property, 
m^tgagf *^^ ^^^ general mortgage is called a " blanket 
mortgage." That is, it is a mortgage which 
covers the properties held as security for the payment of 
all previous issues. 

Several independent properties or corporations may be 
consolidated. Each of these companies consolidated has 



SALES OF LONG-TIME PAPER 



1Y5 



creditors to be paid, and the new company has need for 
new funds. In order to provide for the redemption of 




176 HOW FUNDS ARE OBTAINED 

bonds outstanding against the old companies, as well as for 
financing the needs of the new one, the whole debt is con- 
4 Consoli- solidated and bonds are issued under a common 
dated mort- security to this end. A consolidated bond, 
gage. therefore, is one of an issue secured by a gen- 

eral mortgage on properties consolidated, the purpose of 
the issue being that of refunding the outstanding obliga- 
tions of the several concerns combined. 

A large system of railroads is commonly made up by 
consolidating or uniting a number of smaller companies. 
The New York Central was organized in 1854 
honds!^^^^^^ as a consolidation of seven or eight short local 
lines running along the Erie Canal. The Penn- 
sylvania system is made up of a large number of smaller 
systems. The J^ew York, ]^ew Haven & Hartford is an- 
other example of this kind. When these consolidations are 
made there are usually several bond issues already out- 
standing on the several roads that enter into and become a 
part of the new consolidated system. These old roads be- 
come divisions of the new system, and their separate out- 
standing bonds are called "divisional bonds." The term 
applies to railroad bonds of this kind alone. 

The bonds bu far discussed have had for security a 
mortgage on some form of real property. Yery often the 
bond issue is based on personal property. One 
^usflonP^ ^^ *^® ^^^* common of this class is the col- 
lateral trust bond. This is the same as a col- 
lateral note, except that the whole issue has for security 
other stocks, bonds, or mortgages placed in the hands of a 
trustee under a contract which j^rovides for their sale. These 
securities are placed in trust for the payment of principal 
and interest. They may be sold and the proceeds applied 
in case of failure of the one issuing the bonds to make pay- 
ment at the time that interest or principal of the issue be- 
comes due. These contracts of trust, or collateral security, 
usually allow the maker to substitute securities of equal 









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13 



178 HOW FUNDS ARE OBTAINED 

value in case he wishes to use or dispose of any part of 
those originally deposited; such substitution, however, is 
subject to the discretion of the trustee. 

Another form of bond, the security for the payment of 
which is a mortgage on personal property, is what is known 

as an equipment bond. A company wishes to 
ment^bond purchase machinery or equipment. It has not 

funds enough to pay for the amount needed. 
The company therefore makes an arrangement with a manu- 
facturer of equipment, or some company having machinery 
to sell, to take bonds, secured by a mortgage on the ma- 
chines purchased, in payment. This is one of the devices 
commonly employed in buying ''rolling-stock" for rail- 
roads and machinery for manufacturing plants. The bonds 
run for a comparatively short time, and usually bear a good 
rate of interest. 

One of the most highly specialized forms of railroad 
securities is what is known as the car-trust bond. This is 

quite different in form from all other classes of 
honds' ^^^ bond obligations. The car-trust, as it is called, 

is a concern which purchases cars from a manu- 
facturer. It will then sell them to a railroad on the instal- 
ment plan. Or, to speak more strictly, the car-trust will 
lease the cars to the railroad under an agreement which 
provides that when the railroad company has paid a certain 
amount of rent the railroad company shall become the owner 
of the cars, but until such time the car-trust shall own them. 
Let us suppose that the Ontario & Western Railroad should 
arrange with the Central Car-Trust for $100,000 worth of 
cars. It might be provided that the Ontario & Western 
would pay $5,000 per month as rent, and that when it 
should have paid twenty months' rent at $5,000 per month 
it would own the cars. The car-trust bond is simply the 
obligation given by the car-trust company, the security for 
which is the cars rented to the railroad, the payment on the 
bonds being secured by payments of rent. The form of 



SALES OF LONG-TIME PAPER 



179 



car-trust issued by the American Transportation Company 
is reproduced here in line engraving : 






>/^^'i^y^X/C</^t'::^/^^ JANUARY 1902 ,yU^//> 



RY 1902 ,yW//^/Mfj/^^r/^/^Jt'ffnr//^ 

^ul^r^//J^f)^f„ y>'^'^^^p?)v/''Mf'M hy/ff^k/^^^W/d ^/k'0n^n^/::^r/mj ' ' '' 









9. Debenture 
bonds of 
financial 
companies. 



^^n[i^K/y^J^^/^.^^%u//'/r(r/i^/^f/i, .^_^ . , 



The term debenture bond is the most loosely used of 
any of the terms descriptive or suggestive of financial in- 
struments. Debenture means debt, and might 
be applied logically to any kind of a credit in- 
strument. Its uses, however, have come to be 
quite strictly defined in certain financial rela- 
tions. The " debenture bond " of a financial company is a 
form of collateral trust or credit obligation, secured by 
deposit of bonds and mortgages owned by the company. 
These "debentures" are used to obtain funds for per- 
manent use in the purchase of other bonds and mort- 
gages, which may again be used as a security for a fur- 
ther " debenture " issue. A facsimile copy of such a bond 
issue by the Equitable Mortgage Company is given on 
page 180. From a reading of this it will appear that the 
Equitable Mortgage Company of Kansas City, Mo., "to 
secure the payment of this debenture and all others of this 
series, . . . has deposited with the American Loan and 
Trust Company of Xew York certain real- estate securities 



180 



HOW FUNDS ARE OBTAINED 



equal in amount to the debentures issued, ... all of 
which are first liens upon real estate appraised at not less 




than two -and -one-half times the par value of such securities." 
A schedule or list of securities deposited with the trust 



SALES OF LONG-TIME PAPER 181 

company is indorsed on the back of each bond. The de- 
bentures of financial companies are regarded as first-class 
investments. 

Kaih'oad companies issae a form of bond called a " de- 
benture " which is quite different in character. These bonds 
10 Railroad ^®^'/ often have no security for the payment of 
debenture interest ; many times the principal also is unse- 
bonds, cured. The payment of interest is dependent 

on the surplus net earnings of the road. Instead of being 
a first lien on the properties and incomes of the road, they 
are a last claim, and stand in a rank inferior to all other 
bonds of the company ; they are in some respects inferior 
to the unsecured short-time credit obligations of the road ; 
they lack the advantage of paper maturing at an early date, 
and have httle or no advantage from contracts of security. 

An income bond is one the interest on which is payable 
out of the surplus net earnings of the company issuing it. 
The interest therefore is contingent on a re- 
lo'ndT^^^^ mainder of earnings after the payment of all 
expenses, cost of maintenance, taxes, interest, 
rentals, and other fixed charges. If there be nothing left, 
then the company is under no obligation to pay interest for 
the year. The interest, however, may be made cumulative 
— that is, while there is no obligation to pay interest if 
there be no funds with which to do so, yet the amount of 
interest contracted for cumulates as a charge which stands 
ahead of all dividends on the common or preferred stock. 
The income bond usually has the payment of the principal 
secured by a mortgage, which, although junior to other 
mortgages, gives to the income bondholder a rank ahead of 
the general, unsecured, creditor (see page 182). 

Other bonds take their names from the purpose of the 
issue, as, for example, the Purchase-Money Bonds issued in 
substitution for the indebtedness of the Virginia Central Kail- 
road Company (page 184). In 1878 the Chesapeake & Ohio 
got control of the Virginia Central and arranged a consolida- 




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PUBLISHING COMPANY. 



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SALES OF LONG-TIME PAPER 183 

tion whereby the securities of the contested road were taken 
up and replaced by the credit securities of the larger corpo- 
. ration. To this end, and as a means of securing 
fied accord- f unds with which to cancel those which could 
ing to their ^iot be exchanged, the issue was made. Exhibit 
is also given (page 186) of the Improvement 
bonds of the Philadelphia & Reading. These are issued for 
the purpose of financing the enormous coal properties pur- 
chased in the 'TOs, and for improving the equipment of the 
road for handling its increased business. The bond here 
shown is an old one ; it has been through four receiverships 
and reorganizations — has been subject to all the financial 
extremities of that great system whose destiny has been 
linked with the development and manipulations of the 
anthracite coal regions of Pennsylvania. 

Bonds also differ in the contracts of payment. The 
contract may be for the payment of gold coin of the 
GUI d ^^iiited States, of present weight ' and fineness, 
in which case they are called "gold bonds." 
They may be made payable in any form of money that is 
legal tender for the payment of debts. These are called 
legal-tender bonds. With reference to the 
bonds'^^^^^^ form of contract for the payment of principal 
and interest, there are two classes : (1) coupon 
bonds and (2) registered bonds. A coupon bond is usually 
made payable to bearer, and the interest payments are rep- 
resented by separate interest notes attached to 
dST ^"''"^ *^^^ principal obligation. When a coupon be- 
guished from comes due, the holder of the bond will " clip " 
blndf^^^ or cut off the coupon which has matured and 
present it for payment in the same manner as 
other notes are presented. This is usually done by " de- 
positing " it at the bank where the holder does his busi- 
ness ; the bank will receive it " on account " and send it to 
the office of the company or to the bank where the com- 
pany does its business. The registered bond, on the other 



SALES OF LONG-TIME PAPER 185 

hand, has no separate contract for the payment of interest. 
In order that the company may know to whom hiterest is 
due, the owner is required to register the bond with his 
name and address at the office of the company or at the 
office of an agreed financial agent. Then the payment will 
be made by a check, the company remitting interest to the 
registered holder when interest comes due. 

Bonds may also have a provision made for payment be- 
fore the time of maturity, at the option of the maker. For 

example, a twenty -year bond may be made 
fondT''^^^ payable at the end of ten years if the maker 

so elect ; or a fifty-year bond may be made 
payable after twenty-five years, and on the 1st of January 
each five years thereafter, if the maker so elect. This pre- 
vents the creditor making demand before the ultimate time 
of maturity, but gives to the debtor the right to pay his 
debt before maturity. 

Other classes of bonds take their names from the special 
privileges granted to the owner or holder. Convertible 

bonds are credit obligations which may be con- 
honZ^'^^' verted into some other form of liabihty. That 

is to say, a mortgage bond may give to the 
holder the right to convert his holding into preferred stock, 
or a divisional bond may be made convertible into a con- 
solidated mortgage bond. 

Like a promissory note, a bond may be canceled by 
payment. Being a contract for the future delivery of 
Payment and ^oii^Y) the contract is fulfilled when the money 
extension of is delivered according to the tenor of the 
^^ ^' agreenient. It sometimes happens, however, 

that the maker, or one issuing the bond, is unable to fulfil 
its conditions. Then the only remedy is " settlement." A 
settlement may be effected by judicial procedure or volun- 
tarily between the parties. By judicial procedure, the prop- 
erty on which the lien contract of security is held may 
be sold. By voluntary agreement, something other than 







VI 



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SALES OF LONG-TIME PAPER 187 

money payment may be taken, or an " extension " may 
be made. A contract of extension is shown on page 
188. This contract is between the Reading Company (a 
security-holding concern) and the Philadelphia & Reading 
Railroad. 

Receivers' Certificates 

In a corporation to which so many have made contri- 
butions of funds — a company whose proprietors are divided 
into classes (common and preferred), and whose creditors 
have distinct rights and opposing interests — controversies 
very often arise which require the interference of courts 
to protect the rights of parties concerned. The property 
is usually in the possession of the ofl&cers of the company 
as representatives of the stockholders. When controver- 
sies arise, the parties in possession control the earnings and 
incomes ; they therefore have a marked advantage. The 
earnings of the Pennsylvania Railroad, for example, amount 
to nearly $100,000,000 per year. The entire stock interest 
is only $150,000,000. Let ns suppose that those in pos- 
session represent only $80,000,000 of the stockholdings. 
During a year they might divert enough current income 
to repay the entire amount of the investment, while the 
other stockholders and the creditors would be entirely de- 
prived of revenue. It often happens that a controversy 
will last several years. To leave the property in the hands 
of any party in interest might prove ruinous to all others. 
As a means of preventing injustices of this kind, the 
court to which the controversy is referred will appoint 
an officer of its own — some one responsible to the court 
— to receive the property of the corporation and man- 
age it pending litigation. Such an officer is called a re- 
ceiver. 

Litigation involves expense. When parties appeal to the 
courts for adjudication of rights and claims, the costs be- 
come a first charge on the property. Court costs are always 















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SALES OF LONG-TIME PAPER 189 

the first claims paid. The expenses of receivership are in 
the nature of court costs. In the management of a railroad 
Security of *^® receiver may be required to obtain millions 
receivers' " of dollars to pay for operation, maintenance, 
certificates. g^ppHes, etc., and to meet current demands. To 
obtain these funds the receiver issues a special kind of credit 
obligation known as a receiver's certificate. These are very 
often issued in uniform amounts and in series, so that they 
appear in the form of bonds. But although they have no 
contracts of security for payment, by virtue of their being 
issued for court costs, they are a prior lien on all the assets 
and incomes of the company. 

The financial advantage of the receiver's certificate to 
the business concern for the operation of which it is used 
is apparent. By its use the receiver is enabled 
tages of to obtain funds when the ofiicers of the com- 

receivers' pany can not. Quite as marked are the ad- 
vantages to the purchasers of the certificates. 
By obtaining a first lien on the property the holders may 
force all other claimants to terms, and even drive a first- 
mortgage bondholder to settle. This brings the parties to 
the conflict to an adjustment of interests, when otherwise a 
settlement could not be reached except by selling out and 
winding up the affairs of the company. 



The Lease — its Relations to Finai^^ce 

A lease is a contract entered into which allows one per- 
son, called the lessee, to use the property owned by another, 
called the lessor. Brown wishes to engage in the business 
of manufacture of cotton cloth. Jones has a factory which 
will suit Brown's purpose. Jones will sell the factory for 
$100,000. Brown has not the funds to purchase the fac- 
tory. His capital is limited to $50,000, and he will need 
this to run the plant. Brown proposes a plan whereby he 
can obtain the use of the factory, and pay for its use out of 



190 HOW FUNDS AEE OBTAINED 

earnings. He offers $10,000 per year to Jones for tlie use 
of the plant, the amount to be paid as follows : $5,000 in 
six months and $5,000 one year hence. This Jones accepts. 
The use of the lease is plain. It avoids the necessity of 
raising funds Avith which to purchase that part of Brown's 
business equipment. Instead of the factory being a capi- 
tal asset, and the funds represented as a liability, the rent 
becomes a fixed charge against the net earnings from opera- 
tion. The value of the lease is, that it makes it possible 
for Brown to obtain a business equipment without raising 
additional funds. 

Credit transactions are carried on under the guise of a 

lease. The use of the lease by a railroad as security for 

the purchase of cars has been described under 

The lease as ^^^ ^^^jg u Q^j._^j.^g^ Bonds." The sameprin- 

security. • i • i i • i . i 

ciple IS employed m sales " on the mstalment 

plan." One wishes to purchase a piano. The price is 
$500. This may be paid for at $10 per month. Instead 
of the seller taking a note with a mortgage on the piano as 
security for the payment of the note, he leases the piano to 
the purchaser for $10 per month, the agreement being that 
when the purchaser has paid $500 in rent he shall become 
the owner. 

Some merchants make a special feature of sales on 
credit secured in this way. They advertise extensively, 
The uses of asking people of small means, laboring men, 
the lease hy etc., to deal with them on credit. Instead of 
credit stores, j^^king a direct sale, however, they simply 
lease the cook-stove, the carpet, the wall-hangings, the 
crockery, etc., and retain the title to the goods ; they col- 
lect rents till an agreed amount has been paid, when the 
merchant gives the title to the purchaser. This allows a 
man without accumulated fuuds to set up an establishment, 
and surround himself with comforts of life which otherwise 
he could not afford. He is limited only by his inability to 
pay the rent. 



SALES OF LONG-TIME PAPER 191 

•While the lease gives to the merchant the best security 
possible, it threatens the purchaser with loss of the goods 
Dangers of ^^^^ ^^^ previous payments on them in case of 
lease pur- default of one rent payment. In the case of 
chases. ^^iq piano purchase above referred to, the pur- 

chaser may have paid $450 in rents, at $10 per month, and 
have still only a $50 balance before the title would pass, 
but failure to make the next month's payment would give 
to the owner (the piano dealer) the right to take the instru- 
ment away, and confiscate the whole amount paid in. This, 
is the method commonly employed by company stores in 
the mining districts. The miner can get what he will 
within the limits of the judgment of the company store- 
keeper as to the ability of the employee to make payments 
of rent. But the laborer stands in constant danger of 
losing his all by having his wages stopped for a month. 



PART III 

INSTITUTIONS AND AGENTS USED IN 
FUNDING OPERATIONS 



14 



CHAPTEE IX 
THE UNITED STATES TREASURY 

The Government stands in a double relation to modern 
systems of finance. In the first place, it must provide a uni- 
Relationsof form system of money; in the second place, it 
Government must give attention to its own financial needs — 
systeinsof niust arrange for its own support. The first 
finance. we may call its money function ; the second its 

fiscal function. In this study it is its money functions with 
which we have to deal — its fiscal' relations belonging to the 
realm of public finance. With a primitive people, formal 
acts of Government may not be necessary to the choice or 
use of a common commodity as money ; out of expediency 
a general practice may grow up ; commodities which in 
their nature may be used as a common standard for the 
comparison of value (such as cattle or furs) may serve the 
purpose of exchange. But those substances which best 
lend themselves to the more exact judgment necessary to 
Need for broad and complex commercial relations, have 
coined not the marks of individuality and of quality 

money. stamped on them by nature— such as are 

common to cattle, or furs, or wheat. The trader, there- 
fore, may not so easily protect himself against decep- 
tion and loss. For example : One of the characteristics 
that makes gold so serviceable as money is the high value 
imputed to small quantities of the metal ; another is the 
exact uniformity of weight and quality that can be given 
to each piece. But these divisions and refinements are 

195 



196 FINANCIAL INSTITUTIONS 

purely artificial ; by nature tliey have not uniformity ; they 
have no individual completeness as have cattle or furs, 
and a few grains added to or taken from a piece of gold 
may so materially affect its value as to destroy the service- 
ability of a coin as a standard for judgment. Some com- 
mon unit of weight and fineness is essential. The par- 
^ ^ ties to an exchange, being controlled by mo- 

tives of gain, could not be relied on to give 
character to coin ; the Government — the agency of the peo- 
ple devoted to general, as opposed to private, welfare — must 
give the metal official stamp, which will stand as a guarantee 
and protect the people against the wiles and arts of indi- 
vidual traders. 

Eeference has already been made to the advantages to 
be gained from the adoption of a single standard or unit 
for judgments of value in exchange. This advantage 

^ ^ . ^ . would sup^p-est the use of a sinejle material for 

2. Providing ^ . ^ . T i 

for a complex nioney. i5ut a smgle material does not serve 

system of ^q\\ ^H of the uses of money. The necessity 
for carrying about and transferring such quan- 
tities of money material as will be of great value suggests 
the use of a " precious " metal for the larger transactions. 
Materials which would best serve in this capacity, however, 
would require such minute subdivisions for small transac- 
tions and "change" as to be wholly unpractical. Thus 
gold serves well the main purpose — transfers of larger 
value than $2.50. But the pieces representing smaller 
values would easily be lost, and inconvenient in use. 
Silver does not serve well for large exchanges because it 
encumbers the trader ; but it is convenient and more prac- 
tical than gold for transfers ranging in value from 10 cents 
to $2. Below this, however, silver is not a convenient 
money. The subdivisions necessary for smaller " change " 
make it impracticable, and some such metal as nickel has 
superior advantages until the minimum of 2 or 3 cents is 
reached, when a still "baser" metal is found to be more 



THE UNITED STATES TREASURY 197 

convenient. Bronze may be subdivided to represent values 
of fractions of a cent, but would be too heavy for trans- 
actions of larger amount. There is economy, therefore, in 
a variety of metals in tlie money system. 

The practical question to the nation, and to the com- 
mercial world at large, is. How can the advantages of a 
3 Mainte- single standard (or a definite unit for the judg- 
nunce of a ment of value) be preserved, and at the same 
s an ai . ^^^^ ^^^ unquestionable economy of variety in 
our system of money ? Long and bitter experience has 
driven men to the conclusion that there is only one solution, 
viz., the establislunent of a tmiit^ or standard^ in a more 
precious metal^ and a system of redeniption of cdl other 
forms of money used^ at a fixed ratio. The adoption of 
such a system, however, makes necessary a redemption 
agency, and this can be established and maintained only by 
act of Government. Redemption, however, has the effect 
of reducing all moneys, other than the standard, to forms 
of credit. They constitute in themselves promises to pay a 
definite amount of standard money according to the ratio 
stamped on their faces. If, for example, silver dollars are 
made redeemable in gold whenever a silver dollar shall be 
presented at a redemption agency, then every time a silver 
dollar is put into circulation the Government has put out, 
with this silver dollar, its promise to pay to bearer $1 in 
gold on demand ; the possessor of the silver dollar holds 
By redemp- ^ credit obligation on the Government for the 
tio7i ofinfe- payment of %1 in gold coin of the United 
1101 comb. States stamped on silver instead of having the 
promise written on paper. As a credit instrument, the 
advantage of having the promise to pay stamped on the 
silver coin instead of paper is this : that it adds to the 
promise of the Government a collateral security equal to 
the value of the silver used, and on redemption of the 
promise the Government has this collateral for use again ; 
this increases the assets of the Government held as the 



198 FINANCIAL INSTITUTIONS 

means of meeting promises to pay gold. The gold price of 
silver coin increases the ability of the Government to get 
gold with which to meet these promises. 

But the use of credit money does not logically stop with 
redeemable coin. If a system of money is developed 
whereby coins become promises of the Government to pay 
gold, what is there to prevent it from writing these prom- 
ises on paper and passing that in payment ? There is no 
reason at all, provided the Government at all times keeps 
in condition to meet these promises ; and if it does not. 
By redemp- *^^®^ silver dollars or copper coins would depre- 
tio?i of paper ciate as well. Government credit stands upon 
money. ^^ different footing than private credit. The 

value of the promise depends on the judgment of the indi- 
vidual receiving it as to the ability of the Government to 
fulfil its obligations. In our system, paper money is noth- 
ing more or less than a demand obligation on the Govern- 
ment to pay gold on call ; there must be gold available, 
however, so that no doubt will be entertained on this score. 
The only manner in which Government credit differs from 
private credit lies in the different methods which may be em- 
ployed by the Government to obtain gold with which to pay, 
and this applies as well to its redeemable coin as to its paper. 

The machinery with which a government must equip 
itself to perform its monetary functions embraces three 
The United <iistinct plants : (1) A mint for giving official 
States stamp and guarantee to its coin. (2) A re- 

Treasury. demption agency for safe keeping of the re- 
serve, and for the free interchange of the several forms of 
money used, as the one or the other may be considered 
more desirable. (3) A revenue department by means of 
which necessary funds may be procured to keep the reserve 
intact. In our own Government all three are combined 
in the Department of the Treasury. The Independent 
Treasury may be said to be the key to our whole system of 
finance. 



THE UNITED STATES TREASURY 199 

In this respect our monetary system is somewhat unique 
■ — enough so to warrant an account of the conditions lead- 
ing to its establishment. Before the panic of 1837 and the 
financial depression which followed, the government had 
made various incorporated banks the depositories of its 
moneys, as well as its disbursing agents. Moreover, the 
banks depended on these moneys for the maintenance of 
their system of credit money. The first Bank of the United 
States was chartered in 1791, and continued in operation 
twenty years. In 1816 a second bank was organized by 
the Government of the United States under a twenty-year 
charter. During forty years of this period (1789-1837), 
therefore, the Government had a bank of its own creation. 
At three different intervals, covering in all a 
the Inde- period of eight years, it had to depend on State 
pendent banks. The State institutions, however, were 

so far from the direct control of the central 
Government that the currency and finances of the country 
were left in a state of uncertainty which paralyzed industry, 
and seriously handicapped private as well as public transac- 
tions. The charter of the second National Bank expired in 
1836, the crisis of 1837 ]3roved fatal to State banks, and with 
their failure the whole system of public and private finance 
was involved. The Government lost through its deposito- 
ries $28,101,614.91. The losses of the people through un- 
certainty of credit and the fiuctuation of their money stand- 
ard was many times greater than that of the Government. 
There was a general demand for a change. Yan Buren 
had just come into office when this financial calamity oc- 
curred. In national politics he and his party represented 
State and local interests as opposed to central functions ; 
they were adverse to the chartering of a third Bank of the 
United States. To meet the public demand for a sound 
and stable currency, and at the same time not to antagonize 
State institutions and local interests, an Independent Treas- 
ury was proposed. After three years of political contro- 



200 FINANCIAL INSTITUTIONS 

versj, Yan Buren's measure became a law, but so unpopu- 
lar had tbe Administration become by reason of the Unan- 
cial and industrial depression of the time, that in ] 840 the 
opposition carried the country and Harrison and Tyler were 
elected. The opposition was a fusion party ; Harrison was 
the representative of the old-time Whig — a nationalist in 
sentiment ; Tyler was the choice of the " Nullifiers," an ul- 
tra branch of the States Rights party. These two political 
groups — hostile to the Administration — joined forces to de- 
feat the party in power ; but when their common enemy 
had been overthrown (being hostile in doctrine and inter- 
est) they fell to fighting each other. The Whigs favored a 
central bank. Had Harrison lived, the large Whig major- 
ity in Congress, under the leadership of Clay, without doubt 
would have given us a different financial history. But a 
month after inauguration the President died, and Tyler 
came to be our Chief Executive. The breach between the 
two factions was at first not a wide one. On his acces- 
sion Tyler announced his intention to carry out the policy 
favored by Harrison and his party. President and party 
agreed to repeal the provisions for the Independent Treas- 
ury and to incorporate a third Bank of the United States. 
But while the measure creating the bank was under confer- 
ence and discussion, the breach widened, until finally open 
war was declared, and when the bill had passed both houses 
the President vetoed it. From this time on no quarter was 
given. The " JSTullifiers," having the Administration in 
their own hands, but being opposed by Congress, went 
back to the old party whence they came. The next presi- 
dential election resulted in favor of the Democrats. Polk's 
administration revived the Independent Treasury scheme of 
Yan Buren, and in 1846 it became a well-established part 
of our financial system. 

Through the agency of the Independent Treasury our 
money system has gradually become a highly refined system 
of credit. The United States Treasury is an institution 



THE UNITED STATES TREASURY 201 

possessed of "issue" powers far exceeding those of any 
bank ; and the reserve required is smaller in proportion to 

circulation. Only one successful bank ever ap- 
^ysteT'r Pi'oached it — the Bank of Amsterdam — and 
refined that ignominiouslj failed when the veil of 

^cildit secrecy was drawn and its reserve was made 

known. It is necessary only to refer to the re- 
ports of the Secretary of the Treasury to appreciate the full 
force of this fact. In the Treasury there is held for redemp- 
tion purposes a reserve of $150,000,000 in gold. Primarily 
a reserve of $100,000,000 was created to give confidence in 
the abihty and willingness of the Government to redeem its 
outstanding debt in the form of United States notes (green- 
backs) ; but by the National Bank Act, and by the adop- 
tion of the gold standard, it came to be the redemption 
basis of our whole monetary system. On this account the 
amount of the reserve was increased (in 1900) to $150,- 
000,000. 

Summarizing the credit moneys in circulation at the 
end of the fiscal year 1901, which stood as a charge against 
the $150,000,000 gold reserve, they appeared as follows : 

1. United States notes (greenbacks) $346,681,016.00 

2. National bank-notes 345,126,521.00 

3. Silver coins in circulation 146,287,981.00 

4. Silver certificates 435,014,000.00 

5. Treasury notes of 1890 47,783,000.00 

6. Currency certificates. 

7. Fractional currency notes (shinplastei's) 15,252,349.96 

8. Old demand notes 53,847.50 

9. One- and two-year notes 58,535.00 

10. Compound interest notes 165,850.00 

11. Minor coins (nickel and bronze) 32,936,470.38 

$1,369,359,570.84 

Besides these several forms of money which are supported 
by the $150,000,000 reserve, provision was made whereby 
the gold coins and bullion may be deposited in the Treasury 
and certificates issued in like amount. Of these there were 



202 FINANCIAL INSTITUTIONS 

outstanding $281,678,659, but this was considered a special 
deposit and not available for the redemption of other 
money obligations. 

The transactions of the Treasury in maintaining its credit 
moneys at a parity with gold are illustrated in the work of 
the redemption agency for this year. 

Redemptions and Exchanges. 

1. United States notes $87,862,110 

2. National Bank-notes 60,730,773 

3. Silver coins : 

Standard dollars 39,604,974 

Subsidiary silver 37,066,500 

4. Silver certificates 151,026,473 

5. Treasury notes of 1890 21,298,927 

6. Currency certificates 

7. Fractional currency notes 

8. Old demand notes 

9. One- and two-year notes 

Compound interest notes 

10. Minor coins (nickel and bronze) 4,140,496 

Total redeemed by exchange $401,730,253 

Redemption and destruction 373,852,928 

National Bank-notes redeemed from the 5 

per cent fund 129,100,946 

$904,684,127 

Against the account of redemption and destruction new 

credit money was issued to the amount of $292,532,000. 

^ , . In exchano^e for the $129,100,946 bank-notes 
Redemptions , -, ,, , c -i i , 

of credit redeemed, the same amount oi new bank-notes 

money ^as issued. Althou2:h there were $401,730,- 

durma 1902. . . ^ t j 

253 paid out for redemption and exchange of 

forms of money other than gold coin or gold certificates, 

standard metal was not actually used to any great extent. In 

most cases exchange of one form of credit money was made 

for other forms of credit money. Demands for payment 

were met in such forms of money or credit as best suited 

the wishes of those making them. The amount of gold 



THE UNITED STATES TREASURY 203 

actually paid out in the redemption of the $401,730,253, on 
account of redemption and exchange, was as follows : 

1. United States notes |819,415 

2. National Bank-notes. . , 191,259 

3. Silver coins : 

Standard dollars 10,213 

Subsidiary silver 244,782 

4. Silver certificates 99,897 

5. United States Treasury notes (1890) 562 

6. Minor coins 62,092 

$1,428,220 

At the same time (making allowance for gold certificates) 
there were taken in by way of exchange for other forms of 
money, $1,419,923 in gold, leaving a net balance of gold ac- 
Gold actually ^^^^^Ij P^^^ ^^^ ^m'mg the year on this account 
used for of only $8,297. With this net amount of gold 

redemptions, actually paid out of the Treasury during the 
year, $694,262,253 of credit money was again put back into 
circulation, at a par value with gold. During that year, 
therefore, the net gold drawn from the general fund to 
keep up the reserve was only about xoVo" ^^ ^^® P®^ ^^^^ 
of the $150,000,000 held for redemption purposes. 

IS^ot only are all forms of money made interchangeable 
by the redemption system, and $1,369,359,570.84 of credit 
,, . . money made to circulate at a parity with gold, 

of integrity but through the redemption agency our cur- 

of our rency is kept in e^ood condition, old and tat- 

money. ./ r fc> ? 

tered bills are received and destroj^ed, and new 
bills issued in their stead. 

The mint may be said to be the coin factory of the Gov- 
ernment. It is here that gold and silver bullion is received 
The mint a ^^^ coinage, and mechanical processes are car- 
money ried on necessary to the reduction of metals to 
jac 01 y. standard fineness and to the production of legally 
prescribed coins. The mint service is distributed over the 
country in such places as will best meet the demand. In 
this service there are five mints and seven assay oflfices. 



204 



FINANCIAL INSTITUTIONS 



The mints are located at Philadelpliia, San Francisco, 'New 
Orleans, Carson City (E^evada), and Denver (Colorado). The 
assay offices are located at JS^ew York, Boise City (Idaho), 
Helena (Montana), Charlotte (IS'orth Carolina), Deadwood 
(South Dakota), and Seattle (Washington). According to 
the report, only three of the mints — those at Philadelphia, 
San Francisco, and New Orleans — are employed in coinage, 
the others receiving deposits of bullion in exchange for 
coin. The principal assay office is at New York. It is to 
be noted that the coinage plants are located conveniently 
near to the commercial centers, while the assay offices are 
in centers of metal production and importation. Minor 
coins are made in Philadelphia alone. In 1899 the produc- 
tion was as follows : 



Institutions. 


Gold coinage. 


Silver coinage. 


Minor coinage. 


Philadelphia 


$49,919,180 
58,258,000 


$9,918,311.65 

5,604,275.00 

12,199,000.00 

$27,721,586.65 


$956,910.14 


San Francisco 














Total 


1108,177,180 


$956,910.14 



Pefined bars were produced at all the mints and assay 
offices, however, as follows : 





Deposits of metal. 


refined bars manufactured. 


Institutions. 


Gold. 


Silver. 


Philadelphia 

San Francisco 


$84,936,261.38 

61,315,442.48 

13,447,938.39 

306,976.30 

21,180,138.28 

62,336,445.67 

1,564,698.73 

2,077,991.34 

244,737.45 

111,779.35 

319,748.69 

6,550,698.16 


$868,012.48 


$117,478.08 
17,188.28 


New Orleans 

Carson . . 


3,870.75 


3,950.85 
9,342.24 


Denver 

New York 

Boise 


21,114.763.13 

53.170,116.54 

1,280,657.17 

2,036,679.26 

243,431.68 

110,827.83 

317,301.58 

6,395,250.11 


62,872.07 

8,195,351.06 

25,141.67 


Helena 


39,061.26 


Charlotte 

St. Louis 

Deadwood 

Seattle 


1,305.77 

951.52 

2,447.11 

111,660.72 






Total 


$254,392,856.22 


. $85,540,910.53 


$8,586,710.63 



THE UNITED STATES TREASURY 205 

A laboratory is maintained at the mint for making tests 
of weight and fineness. This work is continuous. A spe- 
cial committee is appointed as a further safe- 
Zm ""^ ^^^ S^^^'^^- ^^"^s ^^^ standard at .900 ; .003 is the 
limit of tolerance. In no case was a newly 
coined piece found to be outside the limit in 1899, while 
only one was discovered in 1898. But few coins depart 
more than .001 from the standard. These figures show 
the exactness with which the unit for judgment of value is 
preserved in the standard money of the United States, 
wliile the redeemable coins are watched quite as closely. 

When a reserve of gold is not kept, equal in amount to 

the credit money outstanding, a revenue department of the 

Treasury is essential. The present reserve fund 

Relation of i , • n ^ • xi i -tx _r? 

the Revenue serves only to give coniidence in the ability oi 
Department the Government to meet present demands. 
^''- For the time being, $150,000,000 of gold in 

the National Treasury is deemed a sufficient guarantee 
that the Government will be able to meet its money obli- 
gations. But it is quite as necessary to give assurance of 
ultimate ability to meet all outside obligations. Under or- 
dinary conditions a few millions of dollars in gold will suf- 
fice to keep the whole $1,369,000,000 of credit money val- 
ued at par. There are times, however, when for business 
reasons, those holding this credit money may wish to have a 
large portion of it redeemed in gold. Demands for gold 
for private use, demands for export, or some shock to public 
confidence in the credit system may cause an extraordinary 
strain on the Treasury. The possibility of such unusual de- 
mands dictates that some means of maintaining the reserve 
intact should be provided. In 1893 the Government found 
itself in a position where the reserve was not only impaired, 
but its very existence threatened. The result was the im- 
pairment of all the credit relations of the nation. All pri- 
vate as well as public credit depends on confidence that 
the Government will be able to redeem its promises, and 



206 



FINANCIAL INSTITUTIONS 



paj gold in exchange for credit money outstanding. It is 
this that links the monetary promises of the Government 
to its fiscal transactions — that makes necessary a revenue 
power as part of its credit money system. 

The Eeport of 1901 shows that on June 29, 1901, the 

Government had in hand $385,642,560.4:6 of gold coin, and 

$109,205,736.96 worth of ^old bullion— $494,- 

Possible dp- ^ ■> ^ o -#- ^ 

mands on the 848,297.42 in all. As against this,, the Gov- 
Treasury for ernment held a special 5 per cent National 
^ Bank-note reserve fund of $13,267,236.27, a 

special fund of $289,017,689 for the redemption of gold 
certificates, and various other special deposit and redemp- 
tion accounts outstanding to the amount of $8,545,644.24. 
Add to these amounts the $150,000,000 reserved by law for 
the redemption of the credit money of the United States, 
and we have a total special reserve of $460,830,569.51 
which must be subtracted from the gold in the Treasury 
to determine available funds. This leaves a net balance 
over and above the redemption funds mentioned of only 
$34,017,727.91, which at that time might have been devoted 
to the maintenance of the Government and to meeting its 
fiscal obligations. 

The receipts for the year from various sources were 
$3,011,031,891; the disbursements, $2,993,795,160. The 
moneys received and disbursed were as follows : 



Kind op Money. 


Received. 


Disbursed. 


Gold coin 


$178,219,548 

59,898,211 

42,966,427 

490,060.280 

52,918,520 

195,676,393 

1,268,944,399 

717,587,461 

4,760,652 


$166,484,087 


Silver dollars. . 

Fractional silver 


49,741,106 
41,225,029 


United States notes 

Treasury notes 


506,035.348 
53,361,616 


National bank-notes 

Gold certificates 


196,670,339 
1,256,329,229 


Silver certificates 


719,497,448 


Minor coins 


4,450,958 


Total ,. 


$3,011,031,891 


$2,993,795,160 



THE UNITED STATES TREASURY 207 

From all sources, including redemptions, clearing-house 
balance and transfers, and expense of Government, during 

the year 1901, $11,735,461 more of gold was 
revenue to received than was disbursed. As before shown, 
meet gold the actual demand for redemption was only 

about ^ of one per cent, while the net demand for 
gold for this purpose was only about j-^^oo" ^^ ^^® P^^ cent. 
Suppose, however, that under our system of interchange- 
able credit money the net demand for gold had risen to 5 
per cent — a very usual demand in times of business adver- 
sity and financial strain : this would have made a difference 
of over $140,000,000 in the amount of gold in the Treasury. 
Not only would the surplus be wiped out, but two-thirds 
of the gold reserve also. To meet such an emergency the 
Government must rely on its revenue powers. Of these it 
has three : (1) Taxation, (2) sale of available assets, and (3) 
sale of its bonds. That it may not always rely on taxation 
is evident from the nature of the money in which taxes are 
payable. For example, in the year 1901, $622,606,298 of 
gold were received through customs and customs deposits. 
Yet, with these receipts, only $11,735,461 more of gold was 
received than disbursed. When the demand for gold is 

strong the gold receipts from customs and 
MquutT taxes become small. Through its taxing power, 

the Government is unable to secure gold with 
which to protect its reserve. When the taxing power is 
inadequate, disbursements in payment of ofiicers, etc., may 
be made in forms of credit money, but this can not do more 
than temporarily protect the Treasury. The credit money 
disbursed soon finds its way through the redemption agency. 
The excess of credit money paid out during times of strain 
sets in motion the " endless chain " of redemptions that 
draws away the surplus. A decrease in the expenses of 
government may somewhat lessen the demand, but if the 
demand for gold through outstanding credit currency be 
strong, the reserve may fall to a low point, and in such an 



208 FINANCIAL INSTITUTIONS 

event neither present economy nor power to obtain future 
revenue through taxation can avail to maintain it. 

In the Treasury at the time mentioned there were $453,- 
702,931 silver dollars, $10,587,556.93 in fractional silver, 
3. Sales of ^^^ $49,396,84:1.98 silver bullion— $513,687,- 
assets of 329.91 of silver coin and bullion as an asset. 

Government jj^^^j ^^ii^ ^^^^^ ^^-^^ ^^^ ^^-y^^ ^^^ ^^^-^f f^^^^ 

by conversion of quick assets, the silver owned would have 
produced something like $250,000,000 in gold coin, and 
would have reduced the credit liabilities of the Govern- 
ment to the same extent. But the Treasurer had no legal 
power to dispose of the silver in his possession. He might 
have turned to his bank assets, of which at the time he had 
$100,010,493.95 on deposit in the ISTational Banks. This 
might have been turned into cash, but it would have given 
no relief, for the banks would then have converted the 
United States notes and the other credit money reserves 
held by them into gold by presenting them at the redemp- 
tion agency. The gold reserves of the Government would 
have been reduced in like amount. 

The third revenue power, loans, must now be resorted to. 
From this alone can relief come when the other powers fail 
to meet monetary credit demands. Without this power our 
whole credit currency system would have failed in 1893. 
In time of stress, with $1,369,000,000 of credit money out- 
standing against the $150,000,000 reserve, the loan power 
may be as essential to the maintenance of the United States 
Treasury as is the power to contract loans necessary to the 
maintenance of the credit accounts of a commercial bank. 

The service performed by the United States Treasury 
is at once apparent. Upon it depends the integrity of our 
^ , . whole money system, and out of the integrity 

of the of the money system grows our system of pri- 

Government. ^^^^ credit. From the United States Treasury 
we now turn to the private institutions and agents used in 
funding operations. 



CHAPTER X 

THE SAVINGS-BANK 

Under a system of exchange, based on consent of par- 
ties, any kind of business may be profitable to the extent, 

„ , and only to the extent, that it renders a service 

Every busi- . *^ „ , ' ^^ «• , xi 

ness based on to society. One who can not oiier to others 

service something which will give them greater enjoy- 

ment or greater business advantage than can 
be had elsewhere at the same price, must either keep the 
thing offered or reduce the price until, in the judgment 
of some member of the community, an advantage is to be 
found in exchange. But one can not sell at a price which 
will yield him no profit and remain long in business. A 
business man must get a return which w^ill pay him for 
his effort, as well as offer some advantage to others who 
deal with him. The formula of successful business is : 
Price must equal cost^ plus a profit. Again, one who 
offers to sell goods at a price which will yield him a profit 
must compete with all others in the market. The fact that 
there are buyers is proof that, in the judgment of those 
buying, a service is rendered to them by the one offer- 
ing goods ; the fact that the one who offers goods at a 
price which brings customers — i. e., remains in a business 
— is proof that he produces and sells at a price which 
yields a profit. In other words, the business man is 
able to continue the particular business in which he is 
engaged under these circumstances only: that he can both 
serve the community and at the same time serve himself. 
15 209 



210 FINANCIAL INSTITUTIONS 

His profit can not be greater than the total service rendered, 
for when he offers goods at a price which leaves no advantage 
to buyers, they will refuse to deal with him. The amount 
of his profit on a particular sale will be the difference be- 
tween the cost of the thing sold and the J9/'^^6 obtained — his 
profit is the margin of advantage which he is able to retain 
for himself through the organization, equipment, and man- 
agement of his business. Let us take for illustration a 
primitive agricultural community, such as may be found in 
many parts of Europe. In such a community a man with 
a hoe is able to obtain an income from his occupation suf- 
ficient to allow him to eke out a miserable existence. This 
is made possible because the European farmer has his busi- 
ness so organized that, at the price paid (a life pittance), 
" the man with the hoe " is a more profitable laborer than 
any other at his command — the European farmer therefore 
employs him. In the Mississippi Yalley, on the other 
hand, the man with the hoe is useless at any price ; here 
the business of agriculture is so organized that a high-class 
machinist (a man of high-grade intelligence) is the more 
profitable. " The man with the hoe " leaves Italy and goes 
to Ohio. In doing so, however, he finds his old occupation 
gone ; he must either change his implements of toil or he 
will soon find himself in the almshouse. In parts of France 
and Spain, in fact through a large portion of Europe, the 
machine-laborer of the American farm would be quite as 
helpless. There, to find employment on a farm, he must 
forsake his old method of labor and become a man with a 
hoe. To follow the sentiment of Mr. Markham in his re- 
markable poem, " the man with the hoe " is doomed ; while 
he is tilling a garden spot (a few acres at most), the West- 
ern farm-hand is '^ tending " 30 or 40 acres of oat-land and 
seeding as many acres of wheat, 30 to 50 acres of corn, and 
has in crop rotation 40 to 60 acres of meadow-land and 
60 to 80 acres of pasture. He has in productive use from 
200 to 300 acres of fertile land. The peasant has for 



THE SAVINGS-BANK 211 

his labor a few tons of produce, all told. The American, 
with his horses, engines, machines, and tools, is producing 
from 2,000 to 3,000 bushels of corn, from 1,200 to 1,600 
bushels of oats, from 800 to 1,4:<J0 bushels of wheat (i. e., 
4,000 to 6,000 bushels of cereals), and from 60 to 80 
tons of hay ; he also is keeping from 50 to 80 cattle 
and from 50 to 100 swine. The peasant produces little 
more than enough for his own keep ; the Western farm- 
laborer reaps a harvest of foodstuffs large enough to feed 
a whole regiment of laborers who are working in other 
fields. The American farmer has a large surplus of food 
to exchange for things produced by others, while other 
producers, being fi-ee to devote their time to their occupa- 
tions, are as liberally provided with a surplus of useful 
products. In the competition between Europe and Amer- 
ica in the markets of the world, the equipment of the 
Western farmer is so far superior to the equipment of the 
farmer of the Old World that even the small pittance must 
be denied to the peasant-laborer, while the American 
"farm-hand'' may demand good wages and still leave a 
wide margin of profit to his employer. An iron -founder 
builds up a large and profitable business in a community 
where before only a blacksmith shop was found. How, it 
may be asked, is this made possible ? There can be but 
one answer : the founder is able to shape his materials better 
or more cheaply than his competitors. To do this he must 
so organize, equip, and manage his plant that he can offer 
better services to the community than did the blacksmith. 

Profits are made by obtaining funds with which to equip 
some business based on service to be rendered. Some busi- 
Increased ^^^ss advantage is recognized ; some service may 
profits the \)q rendered for which others will pay ; to per- 

TBSllIt of 1 1/ ' J. 

increased form this service a new form of equipment is 
capital. needed. In obtaining funds for this purpose, 

however, the one who undertakes it must so organize his 
service, furnish himself with such mechanical appliances, 



212 FINANCIAL INSTITUTIONS 

and direct his business in a manner to put him on a footing 
superior to competitors. There must be a better adaptation 
of means to end. The rneans at hand are not entirely 
material and mechanical. He needs the assistance and skill 
of his fellows ; his scheme of success must be one which 
will allow him to call in the services of others; for this he 
needs funds. Even the things necessary to his mechanical 
equipment can not be obtained to advantage except bj ex- 
change with those whose business it is to furnish them; 
this requires funds. In other words, one must have capital 
to work to advantage, or to do business at a profit. The 
larger the capital the more highly developed the industrial 
organization, the greater are the opportunities made possible 
to him possessed of the intelligence to avail himself of them. 
In recognition of this advantage men direct their ener- 
gies toward obtaining more capital. It has been before ob- 
served that the only way that a laboring man 
Saving as a -. x ^ j. • ' • - i "• i i 

means of has OT obtammg capital is by a process known 

oUaining as saving. For the purpose of his own income 
' the laboring man is a business concern. He is 

governed by the same rules of success or failure as a busi- 
ness corporation. Let us take, for example, the IS"ew Eng- 
land Telephone and Telegraph Company. It has equipped 
itself for serving those who have messages to be sent from 
place to place. In order to do this more effectively, it has 
provided itself with wires, poles, buildings, instruments, etc. 
The earnings of the company received during the year 1899 
for services performed were as follows : 

Exchange service (telephone) $2,934,075.59 

Toll service 818,459.73 

Private line service 68,225.36 

Messenger service 51,778.14 

For rents (real estate) 1,802.92 

Interest on stocks and bonds of other companies 

owned 50.402.50 

Miscellaneous 21.610.39 

Gross earnings for year — $3,946,354.63 



THE SAVINGS-BANK 213 

The expenses incurred in performing this service were 
as follows : 

General expense, including taxes $640,107.95 

Operating expense 652,075.64 

Maintaining the plant 1,384,258.82 

Rentals and royalties 220,724.28 

Private line expense 12,399.54 

Messenger expense 50,693.51 

Real estate expense 1,028.90 

Total expense of year $2,961,289.34 

Net earnings for year , 985,065.29 

. The carpenter finds it necessary to equip him- 

self with the tools of his trade. His earnings 
for the year are : 

Work on Jacob Reiss's barn $184.00 

Work on the Emerson house 265.00 

Shingling Patterson store 67.00 

Repairs on First Nat'l Bank bldg 138.50 

Shop work during year .', . 214.25 

Total earnings for year $868.75 

As a means of carrying on this service, however, the 
carpenter must pay out a certain amount in expenses. He 
„ has clothes to buy to protect himself from 

vidnd and weather and to make himself pre- 
sentable in society ; he has a poll-tax to pay ; he needs 
shelter, etc. His working plant must be maintained — i. e., 
he must provide himself with food and repair tools broken 
or worn out. At the end of the year his expense account 
closes with the following summary : 

Clothing $89.00 

Taxes 2.00 

Board 268.00 

Repairs of tools, etc 27.75 

Room rent 96.00 

Shop rent 100.00 

Incidentals 53.00 

$635.75 
Net earnings for the year 233.00 



214 



FINANCIAL INSTITUTIONS 



The net result of service in the New England Telephone 
and Telegraph Company was $985,065.29. But this com- 
pany had an equipment that represented a capi- 
'^^'' tal of $19,000,000. The carpenter's net earn- 

ings were $233 ; his equipment cost him only $500. Dur- 
ing the year an outhouse burned, where he was working, 
and he had a set of planes and some other tools destroyed. 
It will cost him $50 to replace the loss. This must be 
made good to place him in the same position he was in 
at the beginning of the year. The $233 — the net result 
of his services — are not, therefore, clear profit. His profit 
and loss account will appear as follows : 



PROFIT AND LOSS. 



Loss by fire $50.00 

Net profit for year 183 . 00 

$383.00 



Net earnings $233.00 



The question now arises. What will he do with the 
$183 profits on the year's business ? One of his expenses 
incurred was $100 for the rent of shop. He had paid out 
this amount for the use of a building as a means of provid- 
ing better equipment than he could have furnished with his 
own capital. He also recognizes that he could 

Savings work to hip^her advantage if he had a steam- 

jrom labor. ^ ^ ^ ^ 

engine and some lathes. I*N"one of these things 

will be of use, however, till he can get all of them together. 

He decides to lay by the $183 and add to the amount the 

profit of each year till he has $1,000 — the sum that it will 

cost to buy his machines. It is this process of laying hy 

the surplus earnings or net j)i^ofits for capital use that is 

called saving. 

The service rendered by the savings-bank finds illustra- 



THE SAVINGS-BANK 215 

tion in a story told of a journeyman blacksmith. He was 
a man of more than ordinary ability, but addicted to drink. 
His employer, becoming interested in the man, thought 
that he might induce him to reform his habits. He 
pointed out to the journeyman that he was a man of tal- 
ent ; that he could get regular employment and good wages ; 
that he was spending his income in a way that would add 
nothing to his comfort ; not only was he not improving 
his mental condition, but he was contracting a habit which 
would finally render him morally irresponsible and physic- 
ally unsound. Continued indulgence of appetite would so 
far unfit him for service that no one would care to employ 
him in his present capacity. He would ultimately be re- 
duced to the ranks of the incompetent and end his days in 
poverty. All this the dissipated journeyman admitted 
frankly. " But," said he, " what is there for me to live for 
and work for except the present ? What encouragement 
have I to try to get on in the world ? At one time I enter- 
tained some hope for better things, but this hope is gone." 
He recounted that after learning his trade he had started 
out with the best of resolves. When young and strong he 
had determined to devote himself industriously to his trade, 
to work as a journeyman until he had laid up enough to 
buy a shop of his own. He hoped ultimately to become 
an employer of men, to profit from the skill and labor of 
others, instead of having to sell his OAvn labor to those who 
had the capital with which to make the most of it. By in- 
dustry and thrift he had the first year saved $200. This he 
The service <leposited in a commercial bank. The second 
ofthesav- year added $250 more to his account. A few 
mgs- an \ months later, however, after he had saved some- 
thing over $500, the bank failed, and an insolvency proceed- 
ing of two years left him about $100 in dividends from the 
bankrupt estate. He resolved to trust banks no farther. 
The only service which they could render him was to pro- 
vide a place for the safe-keeping of his savings. They had 



216 FINANCIAL INSTITUTIONS 

failed in this. The banks had everything to gain from 
his patronage ; he had everything to lose from failure. He 
now purchased a wallet and in this decided to carry his sav- 
ings until he had accumulated the requisite amount. Coin 
was heavy ; he exchanged all money of this kind received 
for paper money, and small bills were traded for large ones ; 
these he could easily tuck away in his wallet. The wallet 
he kept with him while at his work, and for safety guarded 
his sleeping-room with a strong bolt. He finally got to- 
gether about $600. Again he thought the time at hand 
when he might become the proprietor of a shop. One night, 
while asleep, a fire broke out in the house where he lived ; 
the smoke thickened around him ; he became stupefied. 
Neighbors coming to the rescue forced the bolts and carried 
him out in time to save his life, but his wallet was left be- 
hind. J^early six years of industry and sacrifice had come 
to naught. In despair, he determined to enjoy his earnings 
as fast as he received them. 

Here was a man of skill ; a man of industrious habits ; 
a man who needed only the encouragement of protection to 
rise to a high plane of hidustrial efiicieucy. But the condi- 
tions were unfavorable to his rise. During the last part of 
the eighteenth century and the first part of the nineteenth 
the laborer's lot was a hard one. In Europe, wages were 
still low, and a quarter of a century of almost 
^JvfJg'Ze continuous warfare (the wars of ^poleon) 
'to the made foodstuffs high. There was small oppor- 

savings-bank. ^^^-^^ ^^^ ^j^^ ^^^^ ^j^o ]^ad no means of using 

his own labor and no means of support other than the sale 
of his skill. England, the most prosperous among nations, 
was overrun with paupers. American conditions were some- 
what more favorable to the laborer, on account of the oppor- 
tunity offered to get out on new lands and to possess himself 
of resources from which he might earn a living, regardless of 
employment and employers ; but even here there was little 
care for the wao^e-earner as such, the man without capital. 



THE SAVINGS-BANK 217 

The first savings-banks were started as benevolent insti- 
tutions, purely and simply. Prof. Albert S. BoUes sum- 
marizes the history of tlieir rise in the following admirable 
manner : " When a great want is felt in the world men begin 
to try to solve the problem of how to satisfy the want. This 
question of dealing with simple men and women, of taking 
care of the humble who had no assets, or taking care of the 
poor who come to want by improvidence or by misfortune, 
appears to have received the studious notice of the econ- 
The first omist and the philanthropist at the same time. 

savings- When Jeremy Bentham and Mai thus enforced 

"^ ^* the benefits of savin o^ in the interest of the 

great body of the people, as well as those who saved, about 
the opening of the century, an English clergyman and a 
Scotch minister, each in his own j^arish, set in operation a 
plan for his parishioners to save money which embodied in 
substance the fundamental principle of the savings institu- 
tion. Contemporaneously, a woman, Mrs. Priscilla Wake- 
field, established such an organization in England. Similar 
ideas were also advanced at the same time by a London 
magistrate, Patrick Colquhoun, who wrote upon the ques- 
tion of popular indigence and measures for its rehef as 
early as 1806. In America, in 1816 and 181Y, the needs 
and the claims of the poor awakened attention at Boston 
and J^ew York, and thought was immediately directed to- 
ward a savings institution, because it was deemed most help- 
ful. In Boston, in 1816, it was proposed ' to form an insti- 
tution for the security and improvement of the savings of 
persons in humble life until required by their wants and 
desires.' The first savings-bank in the State of New York 
was the direct result of a meeting of citizens at the l^ew 
York Hospital on December 16, 1817, to take into consid- 
eration the subject of pauperism. A committee was ap- 
pointed to report on the prevailing cause of poverty. The 
report recites, among other causes, that ' prodigality is com- 
parative among the poor ; it prevails to a great extent from 



218 FINANCIAL INSTITUTIONS 

inattention to those small but frequent savings wlien labor 
is plentiful, wliich maj go to meet privation in unfavorable 
seasons. When the constitution of this society was drafted, 
it declared that one prime purpose of the organization 
should be Ho hold out inducements to those people to 
economy and savings from the fruits of their own industry 
in seasons of great abundance.' The earnestness of the 
men who were members of this organization is proved in 
the passage of the act upon their petition, by the Legisla- 
ture in 1819, for the incorporation of a bank for savings. 
In each of the two years thereafter a savings-bank was in- 
corporated in that State. The Philadelphia Savings-Bank 
was incorporated in February, 1819." 

The service to be rendered by the savings-bank is quite 
a different one from that rendered by the commercial bank. 
With the wage-earner the principal financial service to be 
rendered is not one of providing current funds to him who 
The safe already has capital ; it is one of providing a 
investment of safe investment for the small savings, or sur- 
savmgs. ^^^s net earnings, of the wage-earner in the 

form of an interest-bearing credit account of men without 
capital, men who are toiling for others in order that they 
may accumulate capital funds. The first prerequisite of a 
savings account is safety ; the second is a return of income 
on the investment compatible with safety. A man with a 
shilling or a pound, a dollar or even twenty dollars, can 
seldom find opportunity to invest such a sum to advantage. 
But when the shillings and pounds and dollars saved by the 
The invest- i^^any are exchanged for interest- bearing ac- 
ment of sav- counts, the fund brought together in the bank 
*w^6- an s. ^^^^ week or month will be large enough to 
enable its officers to invest them safely at a still higher rate. 
This furnishes a source of income, and immediately con- 
verts the small savings of the laborer into an investment 
capital. The laborer need not wait until he gets a large 
fund together before he can use it. Moreover, he does not 



THE SAVINGS-BANK 219 

feel that liis saving is a sacrifice, but that he is rendering to 
himself a service and providing himself with the means to 
higher enjoyment. TTith safety and earning poiver com- 
bined, the inducement to saving is vastly increased — the 
industrial community becomes more highly capitalized, 
more efficient, more highly cooperative, and farther re- 
moved from want. The motive to extraordinary efforts 
and saving is shifted from that of self-sacrifice to one of 
higher enjoyment. The laborer is encouraged to strive to 
acquire a working ca23ital which will give him either high- 
er industrial efficiency or an investment fund, the income 
from which will yield a larger competence. 

The service which it is possible for such an institu- 
tion to render in an ordinary community may be illus- 
trated from the industrial organization of a typical town. 
In the place referred to is a flouring mill, a foundry and 
machine shop, two implement factories, a brewery, and 
a wagon factory. These establishments employ about 500 
men ; besides these, there are railway shops which give em- 
ployment to some 250 more. Some of these receive large 
salaries, others are common laborers. The 750 employees 
receive, on the average, about $2 per day. Altogether 
they earn about $1,500 daily — over $35,000 per month. 
Out of this income they have to pay living expenses. With 
each, however, there is a possibility of saving something. 
Some of the better paid ones may save as much as $25 per 
month ; others may not lay by more than $2 or $3 per 
month. Let us suppose that on the average $5 
of the service P^r month might be saved. This would give a 
of a savings- g^.Qss saving fund of $3,750 per month for de- 
posit in savings accounts. But there are also 
between 500 and 600 domestic servants in the town that 
earn on the average $3 per week-y-about $6,500 per month, 
besides board and lodging. Let us say that $2,500 of this 
amount could be made available for investment. This 
would increase the monthly income of a bank to $5,000. 



220 FINANCIAL INSTITUTIONS 

While $1 or $5 could not be conveniently kept or otherwise 
judiciously invested by the laborer, the bank, with $5,000 
in hand at the end of each thirty days, could do either. 
Sixty thousand dollars each year for five years only would 
give an institution $300,000 for investment. If each 
laborer contributed but a mite, the possibilities of such an 
enterprise through the long course of years would prove 
attractive to the best financial managers, and the services of 
such would prove highly beneficial, not only to the individ- 
ual depositors but to the whole industrial community. In 
a large city, contributions of nickels and dimes from the 
many, in time produce an enormous fund. The Philadel- 
phia Savings Funds Society to-day has accounts which 
amount to over $60,000,000, and this fund has been built 
up largely by the savings of the servant class. 

The commercial bank must of necessity keep a large 
percentage of its capital funds available for meeting its 
demand credits. It is organized to serve a commercial 
constituency by providing current funds in this form. As 
a means of maintaining its demand credit, capital contri- 
butions of money are essential. The savings-bank needs 
no capital stock. A savings account is not a current fund. 
Savings depositors do not ordinarily withdraw their accounts 
except in emergencies, or for some better ultimate use to 
which the savings may be a23plied. The demands for 
withdrawal, therefore, are ordinarily smaller than new in- 
vestments of savers. Provision is usually made for with- 
drawals in excess of income, but a reserve of money is 
Savings are ^^^ ^* ^^^ essential to maintaining the credit of 
capital the institution if proper steps are taken for its 

funds. protection. The People's Savings -Bank of 

Pittsburg, for example, at the time of making its report to 
the State Commissioner of Banking, November 19, 1900, 
had accounts to the amount of $6,913,472.81:, while it had 
on hand only $4,776 in cash and cash items. The Dollar 
Savings-Bank of the same place and on the same date had 



THE SAVINGS-BANK 221 

$19,84J:,617.71 in accounts, and only $37,432 in cash and 
cash items. There are in the United States abont 1,000 
savings institutions, of which YOO are " mutual " — that is, 
thej are institutions operated by trustees for the exclusive 
benefit of savers. They are not organized to make money 
for the corporation, but to provide safe investments in the 
form of interest-bearing accounts. The officers and em- 
ployees receive stipulated salaries for services rendered, and 
no dividends are paid except to those who have funds on 
deposit. E'early all of the early institutions are of this kind. 
The first function of the savings - bank — that of safe 
investment of small funds — may not be performed by 
building vaults and storing away the money as it comes in, 
and then paying it out again when requested. The bank 
not only could not pay interest on accounts, but would 
suffer a net loss. This is incompatible wdth the prime ob- 
ject of the savings institution. It is only when safety is 
associated with' income-producing power that the funds 
may be preserved safely and undiminished. The second 
How to deal f^^ction — that of paying an income on savings 
with a sav- accounts — may be performed only by allowing 
ings-hank. ^^^q managers of the bank to use its funds in 
a way to produce revenue for the institution with w^hich 
to pay expenses, repay the amount of the accounts, and 
add thereto an increment of interest or dividends. The 
success of an institution depends upon keeping its funds 
invested. This may be done only by establishing credit 
relations with the depositor on the one hand and w^ith 
borrowers on the other. The credit relation with the de- 
positor is established in the following manner: The laborer 
receives his weekly wage and is able to lay by out of the 
amount received, we will say, $1 after paying expenses 
of living. In case he is employed during business hours, 
his wife may take this dollar to the savings-bank. On 
entering the bank she may meet a janitor or usher, who, 
learning her purpose, will show her a small wall-desk upon 



222 FINANCIAL INSTITUTIONS 

which are pen and ink and proper blanks to be filled out. 
By following his directions, or those which she may find 
printed before her, the " deposit ticket " will be filled out, 
giving name, address, date, and amount to be deposited. 
(Many of the banks make out the deposit tickets themselves 
on account of the difficulties experienced in reading the 
entries of depositors. But the self-executed ticket is con- 
sidered preferable by others on account of the evidence of 
the amount deposited being in the handwriting of the de- 
positor, if dispute arises. This is oftentimes of advantage 
in allaying suspicion of dishonesty on the part of an institu- 
tion dealing with ignorant people.) The ticket with the 
money is passed in at the window labeled " Beceiving Tell- 
er." The depositor is now asked to step to the signature- 
book and write her name, and give such information as to 
residence, age, color of eyes, occupation, domestic relations, 
etc., as may be considered necessary to identification. On 
the signature- book a number is placed opposite the name 
by which the account thereafter is to be known in all trans- 
actions of the bank. The " Beceiving Teller " then makes 
out a " Bass-book " on which this number is stamped, enters 
the amount deposited, and hands it to the depositor. There- 
after all moneys deposited are entered in similar manner. 
Now, what has the woman in exchange for her dollar? 
The bank has one dollar more of money than it had before. 
In making the exchange, the woman has bought a credit 
obligation of the bank to pay her one dollar. To be paid 
when? ]^ot on demand, as in the case of, deposit in the 
commercial bank, but after the prescribed notice (perhaps 
ten days) to be given to the bank of the intention of the 
depositor to withdraw. This rule is made in order that 
after notice is given the bank may not invest the money 
paid in by depositors until sufficient has been held back 
to pay withdrawals for which notice has been given. After 
sufficient coin has been retained for this purpose, how- 
ever, and for current expenses, the bank has no need for 



THE SAVINGS-BANK 223 

holding a reserve, and the other money deposited is free 
for investment. 

But what kind of investment shall the bank make? 
Will it buy commercial paper, as does the commercial bank ? 
Rules gov- It would not be to its advantage to do this. 
errmigin- The " deposits " sold are not for current use; 
the savings- they are bought by the depositor as an invest- 
hank. ment — a long-time investment. Nor can they 

be used as current funds on account of the notice necessary 
for withdrawal, unless the bank elects to have it so. Since 
the deposits are not to be used as currency with which to 
produce or to buy goods, and since the purchase of com- 
mercial paper would not create new deposits at the savings- 
bank, it would only involve itself in risk and trouble by so 
doing. The managers of the savings-bank do not come 
into immediate business contact with merchants and manu- 
facturers, and have little opportunity to know of the con- 
dition of their affairs. But even if it could keep in touch 
with them, such transactions would be one-sided, and the 
investments in commercial paper would have to be renewed 
every thirty, sixty, or ninety days as the case might be. 
There are many reasons which argue against such a dispo- 
sition of funds ; there is little in its favor. 

Of all things that the savings-investment manager must 
take into account, the element of safety is of most impor- 
tance. The bank wants none but safe invest- 
investment. ^^nts. It also wants long-time instead of 
short-time investments. An investment that 
combines these two qualities, however, is usually one of com- 
paratively low rate of income. The amount of investment 
capital seeking that kind of employment is larger in pro- 
portion to the amount of "gilt-edge" invest- 
income. nients on the market than the amount of capital 

seeking investments in which there is a higher 
element of risk— therefore the lower rate of interest. The 
character of investments made by the conservative savings- 



224 FINANCIAL INSTITUTIONS 

bank is best shown bj published reports of these institu- 
tions themselves. For the Philadelphia Savings-Fund So- 
ciety the general classification of its investments is as fol- 
lows 

Deposits with other banks and bankers $1,028,274.98 

Call loans upon collaterals 3,800.00 

Time loans upon collaterals 3,500.00 

Investment securities owned : 

Stocks and bonds $45,505,169.75 

Mortgages 13,319,592.38 

Total investment securities owned . 58,824,762.13 

Total $59,860,337.11 

This accounts for its entire assets, except cash on hand, real 
estate, furniture, and fixtures. A smaller concern, the IS^a- 
tion's Bank of Savings of Allegheny, may be used for illus- 
tration. Its investments appear as follows : 

Deposits with other banks and bankers $105,333.84 

Call loans upon collateral 264,025 .00 

Time loans upon collaterals 45,625 . 05 

Investment securities owned, viz. : 

Stocks and bonds $33,350.00 

Mortgages 510,966.28 

Total investment securities owned 544,316.28 

Total $959,300.17 

The first institution is an old-line " mutual " company. 
The second is a " joint-stock " company with a capital stock 

of $100,000. The first is operated by trustees 
and the joint- for the benefit of depositors. The second is 
stock sav- operated by managers who offer a certain per- 

centage on deposits, as a fixed charge on the 
gross earnings of the corporation, the profits going to the 
stockholders in the form of dividends. The policies of the 
two banks with reference to investments is evidently quite 
different. The Philadelphia Savings-Fund Society has 
about 92 per cent of its funds invested in bonds and mort- 



THE SAVINGS-BANK 225 

gages — 75 per cent being in the form of first-class bonds. 
The bond investments appear as follows : 

United States loans, reg. 4 per cent |1,967,187.50 

Dist. Columbia, guaranteed by United States 
3.65 per cent 1,000,000.00 

Total United States bonds $2,967,187. 50 

Pennsylvania State, reg. 8 J and 4 per cent . 1860.000.00 

Philadelphia City, reg. 3i, 4, and 6 " . 3,635,275.00 

Chester City, reg. 4 per cent 40,000 . 00 

Allegheny City, reg. <1 per cent 606,000 .00 

Pittsburg City, reg. 4, 5, C, and 7 per cent . . 1,544,900.00 

Reading City, reg. 4 per cent 60,000.00 

Baltimore,Md.,reg.andcomp.4, 5,and6perct. 330.000.00 

Boston, Mass., reg. and comp. 4 and 5 per cent 56,878 . 60 

Wilmington, Del., reg. 4, 4i, and 6 per cent. 34,500.00 

Louisville, Ky., comp. 4 and 7 per cent 170,000.00 

Zanesville, Ohio, comp. 4^ per cent 70,000.00 

Cincinnati, Ohio, comp. 7 and 7i% per cent.. 55,000.00 

Cleveland, Ohio, 4 and 5 per cent 203.000. 00 

St. Paul, Minn., comp. 4^, 6, and 7 per cent 212,000.00 . 

St. Louis, Mo., comp. 4 per cent 101,000. 00 

Toledo, Ohio, comp. 4^ per cent , 115,775.00 

Woodbury, N. J., comp. 4 per cent 62,000.00 

New York City, reg. 3| per cent 800,000.00 

Total city and State bonds 18,095,328.60 

Bonds of counties and boroughs, 4 to 6 per cent 549,000.00 

Total municipal and Government bonds 111,923,615.10 

First-class railway bonds 33,581,554.65 

Total $45,505,169.75 

Of the railway bonds, about one-fourth were held against 
the Pennsylvania Railroad, financially one of the strongest 
corporations in existence, and another one-fourth were held 
against the l^ew York Central, the Erie, the Lehigh, and 
the l^orthern Pennsylvania Railroads, l^o shares of stock 
whatever were held. N^early all of the bonds are what are 
known in the market as " gilt edge." 

The Nation's Bank of Savings had only about 3 per 
cent of its funds invested in bonds, and these were entirely 
local and industrial. It had 50 per cent of its assets invested 
16 



226 FINANCIAL INSTITUTIONS 

in mortgages. It is to be presumed that tliese were also 
largely local and industrial. .Fiftj-four per cent as against 
92 per cent in bonds and mortgages, and those 
of^ethodT ^^ ^^ inferior type in the general security mar- 
ket ! About 10 per cent of its funds were 
'• on deposit " in other banks, while 30 per cent were invested 
in commercial paper — short-time loans secured by collateral. 
The loans of this character made by the Philadelphia insti- 
tution amounted to about one-tenth of 1 per cent. Whether 
this difference grows out of the joint-stock interest of its 
managers will not be said, but certain it is that the Alle- 
gheny concern is quite as closely allied with the commercial 
interests as it is with the interests of the working man. 

The deposits that go to the savings bank are usually in 
the form of minor coins, silver, and what is generally con- 

D 7 -• r sidered " chana^e." The collection of such 
Relatio7is of » 

savings-hank money gives the bank a double importance in 
to the money ^^g relation to the nionev system of the conn- 
try. It reduces the amount of small change 
that the Government would otherwise be called on to fur- 
nish to the people. By providing a method for the safe- 
keeping of funds, (1) it reduces the amount of money that 
would go into hoards, and thereby reduces the demand on 
the Government; (2) it indirectly sets up a chain of re- 
demption through the Treasury. The savings-bank also 
has an important relation with the fiscal side of the Treas- 
ury. When an issue of bonds is offered for sale, these 
institutions are among the largest purchasers. They there- 
fore facilitate the funding process of the Government. In 
1899 the savings-banks had investments amounting to 
$137,000,000 in United States bonds. The total deposits 
of that year were $2,179,468,299. Their income amounted 
to over $5,000,000 per month, while cash on hand averaged 
about $100,000,000. These banks are therefore, under 
ordinary circumstances, in a position to absorb a large issue 
of public securities. 



THE SAVINGS-BANK 227 

The business relations of the savings institution to the 

commercial bank are largely represented by its " deposits " 

in those banks. There are times when with- 

Relaiioii of (^^awals exceed deposits : in periods of panic — 

savings-banh ^ . ' -^^ . . ^ 

to other times when those having securities and other 

financial properties must realize on them at once in order 
institutions, r ^ 

to meet present credit obligations, when sales 

of securities are made at a sacrifice — many depositors of 
savings may find it to their interest to exchange their sav- 
ings investments for the properties offered for sale; in 
times of depression also, when the laboring constituency of 
the savings institution is out of employment, large withdraw- 
als may be necessary to meet living expenses. If, upon such 
occasions, the savings institutions do not have a part of their 
investments in such form that they may be readily con- 
verted without loss, they may become embarrassed. Their 
constituency may become frightened and begin a " run." 
Such occasions of emergency and adversity suggest to the 
savings manager the desirability of kee23ing a considerable 
part of the institution's funds " deposited " in one or more 
commercial banks at a low rate of interest. The percent- 
age of funds " deposited " will vary with the circumstances 
of each institution. The commercial banks are always 
ready and willing to sell credit accounts — that is, to buy 
cash from the savings-banks with their own demand credit, 
and pay from IJ to 2^ per cent for the time that payment 
is deferred. It is of advantage to the commercial bank to 
receive deposits from the savings-bank, because the money 
thus deposited strengthens its reserve, and enables it 
to exchange a larger amount of bank credit for loans. The 
low rate of interest paid by the commercial bank to sav- 
ings institutions on deposits, however, makes it quite im- 
perative that the savings-bank keep only such amount in- 
vested in this way as business safety requires. It sometimes 
happens that those who manage savings institutions have a 
personal interest in keeping deposits in other institutions. 



228 FINANCIAL INSTITUTIONS 

When this is the case they are wholly unfitted to remain in 
fiduciary relations to depositors. In some States, statutes 
have been passed regulating the qualifications of officers in 
savings institutions. Past experience has suggested the 
propriety of such laws. 



CHAPTEK XI 
THE BUILDING LOAN ASSOCIATION 

Little more than a quarter of a century had passed be- 
fore the principle of saving was applied in a different way. 
The savings-bank gave to the wage-earner an opportunity 
safely to invest his surplus dimes and dollars until he wished 
to use his capital for industrial purposes or until he could 
employ them to greater advantage in an independent way. 
This gave the best of encouragement to saving and to the 
accumulation of funds for capital use. The Building Loan 
Association was an investing institution which advanced 
to the wage-earner funds for his immediate use on the se- 
curity of his future savings. It has been noted that the 
savings-bank sells interest-bearing book-accounts to cus- 
tomers and then invests the funds deposited in " gilt-edge " 
securities of other concerns which bear a slightly higher 
rate of interest than the rate paid to depositors. The Build- 
ing Loan Association receives a definite amount of money 
each month as a payment on stock held by members of the 
association ; the company then invests the amounts received 
in loans to its members — the members having the profits 
from the loans applied to the balance due on stock. For 
example, an association is formed with a thousand mem- 
bers ; each member takes one share, the par value of which 
is $100 ; he pays down $1, and agrees to pay $1 per month 
on the stock till, with the accumulated profits, the stock is 
paid for. This gives to the association an income from 
stock payments of $1,000 per month, which may be loaned 

339 



230 FINANCIAL INSTITUTIONS 

to its members on such terms as may be provided under its 

rules. 

The distinguishing characteristics of the Building Loan 

Association are the following : (1) Usually every borrower 

rpj -J. .• from the association is a stockholder — that is, 

guisliing the company can not invest in any credit obU- 

features of o;ations or securities other than those of its 
the Building & . . . > ^ ^ 

Loan members ; it is a close corporation both as to 

Association, membership and as to dealing. (2) The capital 
of the corporation is not represented by the amount of 
stock outstanding, but by the amount of the combined sav- 
ings, interest, and premiums paid in by its members after 
deducting expenses. To put it in the language of the 
Ninth Annual Eeport of the Department of Labor : " The 
stockholder or member pays a stipulated minimum sum, 
say one dollar, when he takes his membership and buys a 
share of stock. He then continues to pay a like sum each 
month until the aggregate of sums paid, augmented by the 
profits, amounts to the maturing value of the stock, usually 
$200, and at this time the stockholder is entitled to the full 
maturing value of the share and surrenders the same. It 
is seen clearly, then, that the capital of a building loan 
association consists of the continued savings of its members, 
paid to the association upon shares of stock, increased by 
the interest and premiums which the association has received 
from loans made by it from the savings of its members thus 
paid to the association, and from all other sources of income. 
The amount of the capital of the association, therefore, in- 
creases from month to month and from year to year. Shares 
are usually issued in series. When a second series is issued, 
the issues of stock of a prior series cease. Profits are dis- 
tributed and losses apportioned before a new series issue. 
The term during which a series is open for subscription dif- 
fers, but it usually extends over three or six months, and 
sometimes a year. Prior to the maturing of a share it has 
two values: one is called the holding (or book value), and 



THE BUILDING LOAN ASSOCIATION 231 

the other is called the withdrawal value. The former is 
ascertained by adding all the dues that have been paid to 
the profits that have accrued — that is to say, the holding 
value is the actual value of a share at any particular time ; 
the withdrawal value, on the contrary, is that amount which 
an association is willing to pay to a stockholder who desires 
to sever his connection with the association prior to the date 
at which his share matures. Every association has full regu- 
lations on all such matters, as well as on matters pertaining 
to expenses, notice of withdrawal, and all the methods and 
processes necessary for safe conduct of the business. The 
purchase of a share binds the stockholder to the necessity 
of keeping up his dues, and this secures to him not only 
all the benefits of a savings-bank, but the benefit of con- 
stantly accruing compound interest." 

The character of the institution is especially adapted to 
real-estate loans and to the service of a home-building con- 

^ ^.,. stituency in a community where funds for this 

Conditions , . , / . ^ ^ '^ t x i. v • 

out of 'wMch kmd 01 mvestment are scarce, in tact, it is 
the institu- ^^^ ^f -j^gj^ ^^q\^ g^ situation that the Building 
tion arose. a • ^. rT^^ n , • 

Loan Association arose. Ihe nrst organiza- 
tion of the kind about which we have any information 
was founded January 3, 1831, in Frankford, a suburb of 
Philadelphia. Philadelphia was a fast-growing industrial 
center. Frankford was an industrial suburb. As compared 
with other large cities, Philadelphia has little interest in 
public institutions; the center of interest for a Philadel- 
phian is his home. It is not strange, therefore, that the 
home-building corporation found its first development 
there. The laboring population at that time could obtain 
little aid from establislied institutions ; reliance on future 
savings, as part security for a loan, was not looked on with 
favor. The Oxford Provident Building Association was 
organized to meet the demand for funds for home building 
among people who relied on wages for income. It was not 
until a decade later that the success of the Frankford institu- 



232 FINANCIAL INSTITUTIONS 

tion coni mended the general adoption of sucli a plan to meet 
the demands of other home- building constituencies. Be- 
tween 1840 and 1850 the Building Loan Association took a 
place among the financial institutions of most of the indus- 
trial centers. The great growth of associations of this kind 
came later ; their numbers gradually increased till, in the 
latter part of the century just closed their popularity began 
to decline. This was largely due to the fact that the sav- 
ings-banks and other financial institutions had accumulated 
such enormous investment funds that interest on well-secured 
loaus fell below the rate which would make the special 
building fund profitable to its members. The savings-banks, 
especially, devised plans for application of savings to the 
reduction of principal in such a way that they found a safe 
plan of investment and could offer a low interest rate. 

In 1893, at the time the special report was made to the 
Government by the Department of Labor, there were in 
the United States 5,838 associations with assets amounting 
to something over $500,000,000. Through the aid of the 
5,440 associations reporting to the Commissioners of Labor, 
314,755 homes and 28,459 other structures had been built. 
j^ .. ^ The history of the loans showed only 8,409 fore- 
of business closures, with a loss of only $449,599, or less 
trcmsaded. ^^^^ ^ ^^j. ^^^^ for the entire hfe of the com- 
panies. The magnitude of the business transacted, together 
with the stability and success of their undertakings, suggest 
a more detailed description of financial plans. 

As stated before, loans are usually confined to members. 
While this is the general rule, it finds variance in some of 
Plans for *^® companies when there is no demand from 
making members for loanable funds. From the stock- 

loans. holders two classes of security are taken, viz., 

(1) mortgage liens on the property to be improved, and (2) 
collateral deposits of stock in the association. Usually, 
however, the holders of unencumbered shares may obtain 
temporary loans on security of their stock alone to the 



THE BUILDING LOAN ASSOCIATION 233 

amount of its withdrawal value. There are about 70 plans 
employed for the making of loans among the various com- 
1 Loans at a P^^^®^- -^ ^^^ ^^ these associations loan money 
fixed rate by to the members at a fixed rate without premium. 
• These usually give the privilege of obtaining 

loans in order of application or by lot. In most cases the 
loanable funds are put up at auction and sold to the highest 
bidder. One of the favorite plans of auction 
auction— sale is the following : Interest is set at a fixed 
Advance of rate (let us say 12^ cents per week on $100). 
A member secures a loan of $1,000. To do 
this he subscribes for 5 shares of $200 each, which en- 
titles him to become a bidder for the amount desired. He 
then enters the field of competition at an open meeting of 
the association, offering to pay a certain number of weeks' 
interest in advance. Let us assume that he gets the money 
on a bid for prepayment of 25 weeks' interest. The bor- 
rower would then receive $1,000, less $31.25, the amount 
covered by this bid, or a net sum of $968.75. Then for 
the first 25 weeks he would be exempt from interest pay- 
ments, after which he would pay the regular interest con- 
tracted for. By a number of plans loans are awarded to 
stockholders bidding a premium on the stock instead of 
competing for loans by advance of a definite amount of in- 
terest. One of the most used of these provides 
UddZ^of ^ ^^^ ^ premium to be paid in the nature of a 
highest fixed percentage of dues — the amount bid to be 

vremiumon ^^^^^ ^^ ^^^^ regular monthly dues on the 

stock. In this case the borrower receives the 
full amount of the loan and pays an interest rate established 
by the rules of the association. To illustrate : A person 
wishes to obtain $2,000. He becomes an applicant for 10 
shares of stock which have a maturing value of $200 each. 
Attending the meeting for the auction sale of money to be 
loaned, he makes a bid by which he agrees to pay the regu- 
lar dues of $1 per share per month and 10 per cent addi- 



234 FINANCIAL INSTITUTIONS 

tional as premium. That is, on 10 shares he will pay 
per month dues, $1 per month premium, and interest on 
his loan at the rate of 6 per cent per annum (if that is the 
established rate), or $10 per month interest. The $2,000 
will cost him $21 per month until the stock matures, by ap- 
plication of dues and profits, when he may cancel his loan 
by surrender of his stock if he chooses. By another plan 
the interest payments are proportionally reduced with each 
application of dues to principal. In this case the member 
foregoes his right to participate in the profits of the associa- 
tion. Again, the interest rate may be reduced periodically. 
The variety of plans for maturing loans is such that chap- 
ters might be written without exhausting all the details. 
The illustration as given will serve as an expose of princi- 
ples. A more complete analysis will be found in the report 
above referred to and in the special treatises on the subject. 
An interesting feature of the Building Loan Association 
is the plan for the distribution of profits. It has already 

been said that the dues and profits are added to 
Plans for . i r- i i i i i 

the distrihu- the matunng or book value ol shares held by 

tionof members. That is to say, the amount of the 

earnings of the company after payment of ex- 
penses is distributed to the credit of the balance due to 
the company on deferred stock payments. The appli- 
cation of items of profit, therefore, hastens the time when 
the borrower may surrender his stock in full jmyment of 
his loan. With a company having only one series of 
stock — i. e., a company which terminates with the comple- 
tion of the stock payments of its members and the conse- 
quent maturity of its loans — the plan of profit-sharing may 
be a comparatively simple one. Let us suppose that a com- 
pany were organized with 1,000 members, each holding one 
share, the maturing value of which will be $200. If each 
member pays $1 at the time of taking out the stock, and 
then pays dues at the rate of $1 per month till the stock 
matures ; if, also, interest on loans is fixed at 6 per cent per 



THE BUILDING LOAN ASSOCIATION 



235 



annum, payable monthly, then at the time of organization 
the company would have in its treasury $1,000. At the 
end of each month $1,000 more would be added by pay- 
ment of dues. In estimating the book value and time of 
maturity of the stock, however, interest received on loans 
would have to be reckoned with. At the end of the first 
month the amount paid into the treasury would be $1,000 
+ $5 interest on the loan of the month before. This $1,005 
would be loaned at 6 per cent interest payable monthly, as 
a result of which the treasurer would receive $5 + $5.02, 
or $10.02 in addition to the $1,000 dues. Again, this 
$1,010.02 would be loaned at 6 per cent. At the end of 
three months the return would be $5 + $5.02 + $5.05, or 
$15.07 in addition to the $1,000 payments of members. 
Assuming, therefore, that the borrowers would pay the 
expense of making loans, and that the entire amount re- 
ceived were put at interest, the dues and profits for the 
year would be as follows : 



Length op 

INVESTMENT. 


Amount of 

dues paid in by 

members each 

month. 


Amount of 
interest paid 
each month. 


Total amount 

paid in each 

month. 


Total book 

value of 

each 

share. 


Profits 

per 
share. 


1st month. 


$1,000.00 


|5.00.^ 


11,005.00.^ 


$1.00 


^.005 


2(1 " 


1,000.00 


5.02.5 


1,010.02.5 


2.01 


.01 


3d 


1,000.00 


5.05.^ 


1,015.07.5 


3.03 


.03 


4th " 


1,000.00 


5.07.5 


1,020.15.^ 


4.05 


.05 


5th " 


1,000.00 


5.10.^ 


1,025 25.0 


5.07 


.07 


6th " 


1.000.00 


5.12.C 


1,080.27.6 


6.10 


.10 


7th " 


i,ono.oo 


5.15.^ 


1,035.52.5 


7.14 


.14 


8th " 


1,000.00 


5.17.7 


1,040.70.5 


8.18 


.18 


9th " 


1,000.00 


5. 20. J 


1.045.91.5 


9.22 


.22 


10th " 


1,000.00 


5.22.5 


1,051.13.7 


10.28 


.28 


11th " 


1,000.00 


5.25.5 


1,056.39..^ 


11.83 


.38 


12th " 


1,000.00 


5.28.^ 


1,061.67.5 


12.39 


.39 


Total .... 


112,000.00 


$61.67.<? 


$12,397.22.9 







In this the problem is simply one of computing and com- 
pounding interest on loans made, and dividing the total 
interest received during a definite period by the number of 



236 FINANCIAL INSTITUTIONS 

shares outstanding, thus giWng the rate of profit per share. 
By adding profits to dues paid in, the book valuation is de- 
termined. The withdrawal valuation is fixed bj the rules 
of the company. It is usually something below the hook 
valuation^ and for this another column may be added and 
the office record is complete. With interest and other 
tables at hand, the entries may be made by the secretary at 
the end of each month before the monthly meetings. 

When, however, new series are started each year, the 
computation becomes more complex. There are between 
20 and 30 plans employed by the associations for the dis- 
tribution of profits to serial stockholders. One of these 
plans is the same as that commonly used for the determina- 
tion of partnership profits when partners have entered a 
business at different times, each series representing a part- 
ner. To illustrate : Let us suppose that an association 
whose monthly dues are $1 per share has three series in 
force at the end of the third year, with a fourth series just 
issued; that the number of shares in each series and the 
book valuation per share at the end of the third year are 
as follows : 

(1) Series 1 500 shares, value per share $38.87 

(2) Series 2 600 shares, value per share 25 . 27 

(3) Series 3 400 shares, A^alue per share 12.32 

(4) Series 4 4,500 shares, value per share 00.00 

Let us suppose that the net profits for the fourth year 
are $3,000. It is evident that a fair distribution of profits 
must have reference to the value of the shares. To deter- 
mine this, however, the profits of previous years are also 
taken into consideration. The total net profit of the com- 
pany up to this time we will assume to be $5,325. The 
problem is to find the earnings on each share at the end of 
the fourth year. Justice to all parties requires that the 
holdings of members be reduced to some common basis. 
Since each stockholder pays in $1 per month, the first dol- 
lar paid on Series l^o. 1 has run for 48 months ; the sec- 



THE BUILDING LOAN ASSOCIATION 237 

ond, 4Y months ; the third, 46 months, etc., to the last dol- 
lar, which has run only 1 month. The average length of 
time that each dollar has run in this series, therefore, is 

— i^, or 24^ months. In Series 2 the first dollar paid 

has run 36 months, while the last has run but 1 month. 
The average length of time for this series is found to be 

— ^^, or 18^ months. The average for Series 3, by the 

24-4- 1 
same process, is found to be — ~&~^ ^^ 12|- months, while 

12-1-1 
the average for Series 4 is only — ^'^, or 6|^ months. The 

stockholders of the first series have paid in $500 per month. 
This multiplied by 48 will give the total amount invested 
by them. Members holding stock in the second series pay 
in $600 per month, which amount multiplied by 36 gives 
their capital investment. The third series pays $400 per 
month, and is multiplied by 24. The fourth, paying $500 
per month, is multiplied by 12. All of these shares are 
reduced to a $1 investment level by multiplying the num- 
ber of dollars paid in in each series by the average time 
that the series has run. The result is as follows : 

Series 1 |500 x 48 = $24,000 x 24^ = $588,000 

Series 2 600x36= 21,600 x 18i = 399,600 

Series 3 400 x 24 = 9,600 x 12^ = 120,000 

Series 4 500x12= 6,000 x 6i = 39,000 

Total investment for one month $1,146,600 

Using the total $1,146,600 as a common denominator, 
an apportionment is made : 

Series ^' ^ ^46'600 ^^tIiT ^ ^^'325 = $2,730.77 -f- 500 = $5.46 per share. 

Series2,-??l^or-^ X 5,325= 1,855.81 -^ 600 = 3.09 " " 
1,146,600 1,911 

Series 3, ,-4^5:2^ or -^ X 5,325= 557.30 --400= 1.39 " " 
1,146,000 1,911 



238 FINANCIAL INSTITUTIONS 

Distributing the profits thus determined to the several 
shares their hooJc values will be : 

Series 1 $48 + $5.46 = $53.46 per share. 

Series 3 36+ 3.09= 39.09" " 

Series 3 34+ 1.39= 35.39 " " 

Series 4 13+ 0.36= 13.36 " " 

In apportioning the profits by this plan it is necessary to 
allow compensation for stock sales made at different times, so 
that all parties within one series may be on a common footing. 
Other plans of profit-sharing will not be discussed here. 

The theory of a share in a building loan association 
is, " that when the periodical dues paid thereon, together 
with the profits earned thereby, amount to the 
I 1 awa ^i{iYiditQ^ or, technically, the maturing value of 
the shares, the holders shall be entitled to re- 
ceive, in cash, such value, if the shares have not been 
pledged for loans ; if pledged for loans equal in amount to 
the maturing value, then the loans shall be canceled ; if 
the loans do not equal the amount, the maturing value of 
the pledged shares, then the holder shall receive in cash 
the difference between the amount of the loans and the 
maturing value of the shares." It sometimes happens, how- 
ever, that a stockholder may wish to withdraw before the 
maturity of the series in which he is interested. This makes 
the adoption of some plan necessary to render substantial 
justice. This is usually determined by the rules of the 
company at the time of its organization and becomes a part 
of the investment contract. One plan, employed by about 
200 associations, allows the withdrawing stockholder to re- 
ceive only the dues paid in on his own shares, the profits 
earned being retained for the benefit of those who remain 
until the series is closed or matured. 

By another plan the withdrawing stockholder receives 
dues paid in together with interest on the amount at a 
fixed rate ; this, however, being below the rate earned by 
the stock in his series. 



THE BUILDING LOAN ASSOCIATION 239 

Again, the full profit earned may be paid on withdrawal, 
subject, however, to such fines, penalties, and dues unpaid 
as may stand on the books, together with a withdrawal 
fee prescribed by the rules of the company. A com- 
mon practise is to allow a definite proportion of the 
earned profits, as, for example, 75 per cent, the remainder 
reverting to the series. This proportionate rate may be 
conditioned on the time that the stock is run, the percent- 
age of discount diminishing with the length of time of the 
investment. 

There are 12 distinct plans described in the Government 
report above referred to. Provision is usually made in the 
constitution and by-laws of ' companies for the giving of 
notice by stockholders desiring to withdraw. It is also 
usually provided that only a percentage of funds received 
may be used to pay withdrawals. If notices of withdrawal 
call for more than the amount available for this purpose, 
the applicant must wait until there are sufiicieiit funds in 
the treasury. It is this feature that protects the building 
and loan association from danger of bankruptcy. When all 
expenses are paid by fees and charges made at the time that 
loans are contracted for or stock is issued, the company can 
not become a bankrupt for the reason that no fixed or cur- 
rent charges can arise which will shorten the life of the in- 
stitution ; there are no current liabilities to meet. Obliga- 
tions are only to members or stockholders. 



CHAPTEE XII 

THE COMMEECIAL BANK 

In getting together materials and organizing service for 

business on a modern basis, of highest importance are ar- 

The service rangements for current funds — cash resources. 

of the com- These are necessary to exchans^e. Neither 
mercial ocmJc i . i . t i -n i 

to a comtnu- mechanical equipment, supplies, nor skilled 

^*^2/- labor can be obtained to advantage without a 

working cash capital. He who is prepared to furnish such 
funds is equipped to render a service for which the farmer, 
the manufacturer, and the merchant — all who are engaged 
in the active management of industry — are willing to pay. 
To illustrate : Brown has purchased a mill and water-power 
conveniently located on the edge of the great wheat belt. 
For this he has paid $150,000, but many of the machines are 
antiquated, and expensive to operate. Sixty thousand dol- 
lars more are expended in improvements. He now has his 
mechanical equipment. Still there is much lacking. Grain 
must be purchased ; labor must be employed and wages 
paid ; transportation charges must be settled, and current 
expenses must be met. All these outlays must be made 
before return may be had on sales of goods purchased. He 
Necessity for must look for profits for the year in the margin 
current funds ^f ^^in between total outlay and total receipts 
i/i the capi- J. T 1 • X e ^1 

talization of irom sales measured m terms oi the common 

industry. standard of value. The outlay must be made 
weeks before return is had, and this, too, must be commen- 
surate with the size of the working plant and the volume 
of business handled. The element of time necessary to the 
240 



THE COMMERCIAL BANK 241 

most advantageous production and distribution of goods 
requires that he provide a working capital (current funds) 
of about $100,000. 

The question now presents itself, How shall these funds 

be carried ? Shall he lay in a stock of money ? A delivery 

, , of ffold will satisfy demands on contracts for 

0OStcicl6S to 

business labor and material ; but the dangers entailed in 

without a keeping such an amount of money as is needed, 
the breadth of the field covered in his .business 
transactions, the variety of interests involved, and the num- 
ber of payments to be made, would render this a highly ex- 
pensive form of cash assets. Every consideration disposes 
him toward a more economical form of " current funds," if 
such may be had. But the miller is not alone in this desire. 
His is not the only business interest in the community. Falls 
City, the place where Brown's mill is locaxed, is a town of 
10,000 inhabitants. There are a number of other industries, 
each of which is in need of working capital. The town is 
a local trade center, and merchants of every class are there 
with stocks of goods to supply the wants of country and town. 
If money were the most available means of effecting ex- 
changes, each would suffer the same inconvenience — each 
would be under the necessity of keeping a " strong box," 
fire-proof and burglar-proof; even then they would not be 
secure against loss. Current funds are an absolute neces- 
sity ; with a stock of money pi'ovided, each would have to 
keep a guard, for no box is too strong to be "cracked" 
with modern instruments, and there is no combination lock 
that may not be " worked " if time and opportunity be 
given. The expense and risk of the money system would 
not end here. Brown is doing a business that would in- 
volve the handling of from $5,000 to $20,000 per day ; 
much of this outlay is made in transactions of small amount ; 
it would be necessary to have a comparatively large, highly 
paid, and responsible clerical force to count out the money 
and make change. The business organization of the whole 
17 



242 FINANCIAL INSTITUTIONS 

place would be encumbered with expense and inconvenience, 
and transactions at a distance would be made extremely dif- 
ficult. Such conditions as these furnish the business oppor- 
tunity for such service as the commercial bank is organized 
to render. The service and the profits made and the mutual 
advantages gained by the first bank in Falls City suggests 
the organization of another, and still another, until at the 
present time there are six banks in the place, all doing a 
thriving business. 

With this equipment, instead of carrying a large amount 
of money in purses and vaults, and keeping a guard and a 
1 B kf - ■'^^'S® corps of money-changers, the miller has 
nishes cur- on his desk a " check-book." His $100,000 

Tefm-mlt " ^^^^ " ^^P^*^^ ^^ divided between his local 
''lank town and New York. - Temporarily he has 

credits $50,000 in gold locked up in "safe deposit." 

This he withdraws and sends by express from E'ew York 
to Falls City. On arrival at his place of business he orders 
the express company to deliver the gold to the Falls City 
Bank ; with this he buys a bank account of $50,000 — i. e., 
he " deposits " the amount, and receives credit to like amount 
" on the books of the bank." 

He also takes all moneys received by him in the course 
of his business to the Falls City Bank and exchanges them 

for bank credit. I^ow, when grain is purchased 
''hank from the farmers around, or from the local 

credit " for dealer, or when wa^es are paid or machinery 
money. it t n , , ^ >' 

and supplies are bought, or transportation 

charges are to be settled. Brown signs a check for the 
amount involved. He draws against Falls City or ISTew 
York, as may be to his greater advantage. For local pay- 
ments he makes out a local check ; if an Eastern account is 
to be settled, he checks against IN^ew York. It costs him 
nothing to pay in New York what he owes there, whereas 
he would have to pay " exchange " — i. e., cost of collection 
— if he sent a Falls City draft. 



THE COMMERCIAL BANK 243 

But the bank renders another service. J^early all pay- 
ments made to the miller for goods sold are in the form of 

credit. " Cash " sales are for checks and drafts 
3. Allows its £ . 1 u 1.' 1-) 1 

customers to ^^ customers ; sales on " time are exchanges 

convert of goods for notes or credit accounts — credit 

" till ^') ^'i P ^^ *~ 

credit'' into obligations of purchasers to pay money at a 

''hanh future time. !None of these may be used 

credit " 

to advantage by Brown as '•• current funds " ; 

neither can he present them for payment at the time and 

place specified ; nor can collections be made to advantage 

by Brown personally. The places are widely scattered ; it 

is important also that he give his time to other matters of 

business than the collection of checks and drafts and credit 

obligations. He therefore writes his name across the backs 

of checks and drafts (indorses them) and turns them over 

to the bank. The bank not only assumes to attend to their 

presentation and collection, but it credits Brown at once 

in full with the amount turned over. The rniller has a 

pass-book — i. e., a book of convenient size to be carried in 

his pocket — in which the receiving clerk at the bank enters 

the amount of the checks and money received " for deposit " 

on the debit side. The debit side of this book represents 

Brown's credit at the bank — the amount that the bank is 

indebted to Brown. Periodically — say once a month — this 

pass-book is turned over to the bookkeeper at the bank, 

and he enters on the credit side the amount of items paid by 

the bank on Brown's order. The bookkeeper then strikes 

a balance and makes a new entry of the amount still owing 

by the bank on the debit side. Each afternoon Brown's 

bookkeeper makes a memorandum of all the money and 

checks received in the course of the day's business on what 

is known as a "deposit slip." This, together with money, 

checks, and pass-book, he takes to the bank and hands to 

the receiving teller for a new entry to Brown's account. In 

exchange for the checks, drafts, and notes (commercial 

paper) sent in for " deposit," Brown receives " bank credit," 



2M FINANCIAL INSTITUTIONS 

the bank relying upon Brown's guarantee of indorsement 
on the commercial paper deposited. 

If, however, Brown does not wish to assume the respon- 
sibility of indorsing the checks and drafts "for deposit," or 
if the bank does not care to exchange its credit 
agent for the "deposit" for these checks, drafts, and notes 
presentation on even terms ; or, again, if there are notes and 
tion of accounts that have been obtained by Brown in 

" '^^^/.f^f^^ the course of his business that he does not care 

Cf^Pfj 1 f 

to exchange for " cash," these may be turned 
over to tlie bank upon Brown's indorsement " for collec- 
tion." The bank in this case does not at once give Brown 
the right to draw against it. It does not exchange any- 
thing for these credits so turned over. It simply assumes 
to act as Brown's agent for the purpose of presentation and 
collection, and when collection is made sends notice of the 
fact. 

The funds so held are trust funds, and they remain " in 
trust " with the bank until order is received from Brown 
to place them to his general account ; in which 
fruftfe^ ^^^ ^^^^' ^^ ^^^ bank acts upon his order, an ex- 
change is made of "bank credit" of like 
amount for "trust funds" held, and the trust ended. It 
may be to Brown's advantage at times to w^ithdraw a cer- 
tain amount of money from the bank ; in other words, to 
exchange " credit " to his account for " money," which 
amount so withdrawn may be placed with the bank in trust 
for some special use or business purpose. This will also 
place the bank in relation of trustee instead of debtor, and 
the funds so held will be held for Brown and subject to 
Brown's order and direction ; they can not be used by the 
bank as assets of its own. The bank may in many other 
ways serve the business comnmnity as trustee in the caring 
for and handling of current funds. 

Brown's New York bank account may run low, and he 
may wish to increase it. For this purpose he may draw out 



THE COMMERCIAL BANK 245 

gold from the Falls City Bank — i. e., may demand payment 
of his deposit in gold or other " legal tender " — and trans- 
fer this to New York by express. But if he has in mind 
his own business advantage he will not withdraw gold 

or other forms of money. It will cost him, 
I'xlfnge, ^ay, $1 for $1,000 to ship money to New 

York. He will instead seek " exchange." He 
asks the cashier how much he will charge for a check of 
the bank on its New York account. The bank could never 
ask more than the cost of sending gold, for in such case the 
customer himself would " draw " on the bank. It will usu- 
ally ask less. The bank is able to do this because demands 
are made in New York for money to be sent to the West. 
If checks are drawn for remittance to the West, then, on set- 
tlement between the various banks, only so much money 
will have to be sent from one to the other as represents the 
balance due. The Falls City Bank may have on its own 
counter $10,000 of " exchange " on New York, or may know 
where it can obtain that amount at par. If Brown wishes 
to send $15,000 to New York, and the bank has, at par, 
$10,000 of New York exchange, at $1 per $1,000, it will 
cost only $5 to send the balance. The bank could there- 
fore sell $15,000 of exchange to Brown at $6 and make $1 
profit on the transaction, while Brown would be $9 better 
off than if he had shipped the money. He would prefer 
to pay the $6 rather than spend the time necessary to find 
exchange elsewhere, even though he might save 50 cents or 
$1 by so doing. The sale is therefore made. Brown makes 
out his check against the Falls City Bank " on account of 
New York exchange " for $15,000, and in exchange therefor 
becomes the owner of a $15,000 cashier's check, or draft, 
of the Falls City Bank on its New York " reserve agent." 

In the course of his business Brown may have contracts 
for the delivery of grain in Liverpool. As a matter of 
advantage in purchase he may wish to go to the interior of 
Manitoba for wheat. To purchase there, it may be to his 



246 FINANCIAL INSTITUTIONS 

interest to have money instead of bank credit. He with- 
draws from the bank at Falls City $5,000 in paper money — 

7. Biws and ^^^ ^^^^ not care to be encumbered with the 
sells foreign weight or run the extra risk of carrying gold. 
moneys. jj^ finds, however, that the farmers are not 
acquainted with this sort of " paper," and do not care to 
take it in exchange for wheat. He still does not find it 
convenient to carry the necessary amount of coin, and there- 
fore goes to a Canadian bank for the purpose of exchanging 
American " bills " for Canadian " paper money," a form 
of credit that the farmers have confidence in, and are will- 
ing to accept as a par value with gold. But the Canadian 
bank will not trade v^ithout profit. ' It offers to buy Amer- 
ican bills at 98 cents. In exchange for $5,000 of American 
money, therefore. Brown receives $4,900 in Canadian bills, 
v^hich he takes out into the Manitoba fields and exchanges 
for wheat. He has paid $100 exchange on Canadian money, 
but has had a service rendered him by the Canadian bank 
that is worth much more than the price paid. 

On his way homeward he stops at Deadwood, where he 
finds a merchant who wishes to buy flour. The trader's 

8. Acts as business is to furnish supplies to mining-camps. 
bullion He has little money, but possesses a stock of 

bullion which he has received in the course of 
trade. Brown offers to sell flour F. O. B. at the market 
price at Falls City, and to receive in payment biilhon at the 
market rate in IS'ew York. The bullion is consigned to his 
'New York bank, and on its arrival Brown is given credit 
on his account at the market price of silver, less commis- 
sion. Keturning to Falls City, he finds awaiting him there 
notification of the credit given, and he thereupon places on 
board the cars, billed for Deadwood, the amount of flour 
contracted for. In this way the sale is made to the Dead- 
Tvood merchant as readily and conveniently as if he had 
possessed gold or paper money instead of bullion of uncer- 
tain quality. 



THE COMMERCIAL BANK 247 

The bank has served Brown and his business by reliev- 
ing him of the expense and risk of keeping current funds 
9. Binds to- hi the form of money. It has furnished him 
gether and ^,Y\i\l a kind of credit that will serve him more 
Tusiness rela- conveniently for cash. It keeps his credit ac- 
tions, counts and makes collections, through its agents, 
of all checks received by him in his business. It acts as 
his agent for the collection of notes and bills. It serves as 
trustee in matters where he may gain business advantage 
through such service. It has enabled him to procure money 
with whicli to deal in foreign lands. It has enabled him to 
dispose of bullion and to trade with those having it as con- 
veniently as if they had coin instead. All these services 
are of marked advantage not only to Brown, but likewise, 
by similar arrangement, to all other business in the com- 
munity. Throughout the country, in fact throughout the 
civilized world, these institutions have grown up, and by 
maintaining their own credit engagements with' others, men 
are able to make exchanges of large value by use of credit 
instead of money. By maintaining its own credit the com- 
mercial bank likewise compels its patrons to fulfil their obli- 
gations ; by giving greater certainty to business judgment 
and greater facility to exchange, it has become a potent 
factor in widening the range of commercial industrial en- 
terprise and increasing the opportunities for profit to those 
who have the ability to avail themselves of industrial and 
commercial advantage. Such, in brief, are the principal 
services rendered by the commercial bank to the business 
community. 

But how does the bank profit ? Does it charge its cli- 
ents for making exchanges of " money " for " bank credit " ? 
JS^o. Does it receive compensation for keeping 
the hank. deposit accounts ? No. Does it charge for 
collecting checks on other banks that are re- 
ceived in the course of business and turned in "for de- 
posit " ? ]^o. Does it charge for " collections " ? In most 



248 FINANCIAL INSTITUTIONS 

cases it does not. More than this, it ofttimes pays its cus- 
tomers something for the privilege of performing these 
services. How, then, can the commercial bank afford to 
employ a staff of officers and clerks, build and maintain 
costly business houses and strong vaults, keep guards and 
watchmen, carry a large stock of coin and bullion of their 
own with which to meet outstanding credit when demand 
is made for money, pay maihng expenses and transporta- 
tion charges, and make other outlays incident to services 
rendered to the business community ? It meets all these 
charges out of the income of its business. Banks pay large 
salaries to officers and employees, and they also make a 
good profit in dividends to their stockholders. 

The bank obtains a small proportion of its income from 
sales of exchange, from transactions in coin and bullion and 

other incidental services, but the principal in- 
JProftfs arise .i • i • i ^i i i i • /• 

Old of ex- come, the income upon which the bank relies for 

change of its success, arises from the fact that it deals in 
credit'' for credit, buys and sells credit. For the pur- 
*' time cred- poses of the banker there are two kinds of 
credit: 1. Demand credit — that which is due 
at such time as it may be presented for payment, and which 
bears no interest. 2. Time credit — credit that bears interest 
(interest being proportionate to the amount of money prom- 
ised, the length of time that payment is delayed, and the 
rate agreed on). The chief function of the bank is that of 
furnishing to business men a kind of funds that will pass 
current, such credit as will be received in exchange in lieu 
of money — that is, as " cash." The business community 
needs current funds — currency. Under more antiquated 
systems of business, money served the need for currency in 
exchange. The bank offers a form of currency that will 
serve them better than money. It offers bank credit — its 
own promise to pay money on demand. 

To make its promises pass current, however, it is neces- 
sary to keep enough money on hand to assure the public 



THE COMMERCIAL BANK 249 

that it can meet all demands outstanding. If this is done, 
if the bank so conducts itself that the business community 
has confidence in it, if, in the judgment of " de- 
'^fhS!''^ positors" and other members of the commu- 
nity, it will at all times be able and willing to 
meet its promises, then the superior advantages of using 
bank credit instead of money will cause the community to 
do nearly all its business with the demand promises of the 
bank. If the business public know that they can always 
get gold in exchange for " bank credit," then the obligation 
of the bank will be considered " as good as gold," the value 
of the credit promises will be equal to the value of the thing 
promised. The bank, therefore, must keep such a stock of 
coin (or legal-tender money) in its vaults as will enable it 
at all times to satisfy the public that it is ready to meet 
its promises. The resources that enable the bank at all 
times to retain the money necessary to maintain its "credit " 
are usually contributed by its stockholders at tlie time of 
its organization. 

So long as there is no doubt of the integrity and the 
ability of the commercial bank to pay, it will require only 
a relatively small amount of money to meet 
ifol\^L demands. In the case of Brown's business, his 

bank account may range from $5,000 to $100,- 
000. Here is a widely fluctuating credit, to be sure, and if 
the bank had to keep $95,000 in its vaults to insure its 
ability to meet his checks it could profit nothing from serv- 
ing him. But Brown is not its only customer. The bank 
has several hundred others. When Brown buys his grain 
he delivers checks to a hundred different farmers and grain- 
dealers that are also customers of the bank. Brown's 
account is simply transferred to others on the books of 
the bank. 

A little gold, or silver, or paper money will be drawn 
out daily to meet the demands of trade — to make change, 
perhaps, or to do business out in the country, where the 



250 FINANCIAL INSTITUTIONS 

people do not know enough about the financial standing of 
business men to be willing to accept checks — but in the 
Ordinary daily course of trade about as much money is 
demands for collected by merchants and bank customers 
money. ^^^^ "outsiders" as is drawn out. This is 

brought to the bank and exchanged again for bank credit. 
The amount of coin actually needed, when public confidence 
is undisturbed, amounts to but a fraction of 1 per cent 
of the credit currency of the bank outstanding. In times 
of financial disturbance, when public faith is shaken, it has 
been found by experience that if a bank continues to 
meet its obligations as fast as payment is asked, confidence 
in its ability to pay all demands will be restored before 
30 per cent of its outstanding credit has been redeemed. 
Under all circumstances, therefore, it would not be necessary 
to carry in money more than 25 or 30 per cent of its de- 
posits. 

With $50,000 money capital invested by the stockhold- 
ers, the bank will be able to sell from $150,000 to $200,000 
The hank's ^^ ^^^ ^^^ credit accounts, and will at all times 
salable be able to deliver cash on demand. This is a 

credi . smaller percentage of " credit " than is usually 

sold by the banks as current funds " deposit." The Federal 
law requires a 15 per cent reserve for country banks and 
25 per cent for city (reserve) banks ; but it allows 9 per 
cent of the 15 per cent required of the country banks to be 
deposited in the city reserve banks and to be counted as a 
part of the reserves of both. With a $50,000 capital held 
in its reserve a bank could purchase by use of its own credit 
— make investments — to the same extent that it could, with- 
out credit, if it had $200,000 or more of gold in its vaults. 

What will the bank do with this $200,000 of disposable 
credit ? The stockholders have invested $50,000 of money 
in the bank. The bank has $200,000 of disposable credit 
for investment in other things. It is in the disposition of 
its credit funds that it builds up its clientage, renders the 



THE COMMERCIAL BANK 251 

highest service to the community, finds its own greatest 
protection, and makes the greater part of its income. Let 

us say that Brown sells on the average $50,000 
on%ivest^^^ worth of mill product per month. Some of 
merit of this is sold in Chicago, the remainder in ^ew 

York and Liverpool. He deals with first- 
class wholesale houses. But it takes time to deliver goods 
after a sale is made ; then, too, his business arrangement 
with his customers is that bills shall be post-dated — that is, 
if a sale is made on January 20, ten days, perhaps, may be 
allowed after delivery and the bill will be post-dated May 1. 
This is the date upon which it will be due and payable. It 
is also a rule of business with him to allow 5 per cent dis- 
count from the price stated in the bill for " cash " on de- 
livery. When Brown has a small stock of grain on hand 
he may be able to meet all the demands of his business and 
at the same time carry such of his customers as do not avail 
themselves of the 5 per cent discount. In this case, the 
miller may be able to get 5 per cent on the " cash " price 
for the ninety days' delay. But in the fall, when the best 
milling grains are coming into the local market. Brown may 
find it to his advantage to buy a large stock ; otherwise it 
may be shipped out of the country, and later he would have 
to pay Chicago prices for his grain, besides freight charges 
back again, ^ow, having made local purchases of grain, 
he is not in position to " carry " his customers. He there- 
fore goes to his bank and enters into an arrangement whereby 
he is to turn over to the bank " bills " against his customers 
for mill products sold ; he makes the bank his agent for 
collection, and at the same time he arranges to borrow from 
the bank such amounts as he may need in his business (not 
to exceed 90 per cent of the amount of bills placed in their 
hands). The amount borrowed from the bank is represented 
by Brown's promissory note payable on or before ninety 
days, with interest at 6 per cent per annum until paid. In 
other words, the bank arranges to sell its credit (a deposit) 



252 FINANCIAL INSTITUTIONS 

to Brown in exchange for his interest-bearing obligation to 
the bank. That is, Brown has exchanged his own promise 
to pay at a future time for the bank's promises to pay ati 
once ; but Brown also stipulates that he will pay an addi- 
tional sum to the bank, as interest, in consideration for the 
length of time that his payment is deferred. By keeping 
a money reserve, the bank is able to sell some three or four 
times as much of its " demand credit " (deposits) for the 
" time credit " of its customers (commercial paper) as its 
stockholders had money invested in the bank, and gets 
an income of interest on its "loans" of credit, just as it 
would have done had it "loaned" money instead. In this 
appears the answer to the question. Why does the bank keep 
Brown's account and collect his checks free of charge, be- 
sides doing various other services for him at its own ex- 
pense ? Obviously it is because by so doing it will be able 
to do other business out of which a profit may be realized. 
Brown's first deposit may have been created by a sale of 
money to the bank in exchange for " bank credit.". Again, 
it might have arisen from a transfer of the "credit" of 
some one else for " bank credit." In either case the bank 
has gained a business advantage. If money is obtained, 
this adds to the reserve ; if the credit of others, then their 
credit funds are being reduced and new demands created 
for bank credit. The ones from whom the checks were 
received had bought " deposits." These are being exhausted. 
More than that, Brown is constantly exhausting his own 
account. When further funds are needed by him the bank 
will be able to sell its credit and make a profit on the sale. 

This raises another question. What kind of 
fnvldmLt purchases may a bank make with its credit ? 
that a hank Its business is organized to serve a class of 
mal ^^"^^^"^ people engaged in trade and production. With 
them it must deal and out of this service it 
must obtain its profits. But while the bank serves the com- 
munity, it must at the same time serve itself. For the bank 



THE COMMERCIAL BANK 253 

there are only three kinds of property in which its credit 
may be invested with safety and profit while serving the 
industrial community : 1. It may sell its credit (deposits) 
for money. That is, if a merchant or manufacturer has 
taken in money that he may not find convenient for use in 
his business, he deposits it — takes it to the bank and sells it 
for " bank credit," which he finds more convenient. The 
bank's interest in this exchange lies in its ability not only 
to give bank credit for the money received, thereby main- 
taining a constant flow of coin, but by thus strengthening 
its money reserve to sell some two, three, or four times as. 
much of credit on the sale of which it may make a profit. 
2. It may sell its credit for such credit " securities " and 
credit rights as it may deem necessary to strengthen its re- 
serve^ and relieve it from the necessity of carrying a larger 
sum of money. These investments are usually in some 
form of low-rate interest- bearing obligations. They may 
be in the form of Grovernment bonds or securities that 
may be realized on at any time in the open market without 
loss of principal invested, and at the same time bring in a 
small current income. They are usually deposits in other 
banks (as with reserve agents), or in the form of " call loans 
on collaterals" — investments that may be realized on at 
once, investments that usually bear a low rate of interest, 
but which grow out of commercial transactions. 3. It 
may sell its credit for commercial paper — the short-time inr 
terest-hearing or discountable credits that arise in the course 
of the business of its customers. The manufacturers and 
merchants of a community are constantly selling goods " on 
time." They, however, sell at such a margin of profit that, 
in case funds are needed in their own business, they may 
dispose of the bills at a discount, convert them into current 
funds, and purchase their stock for manufacture and sale 
rather than hold the accounts for final payment with inter- 
est. Their business is that of production and sale of goods. 
Credit to them is only one of the means employed in the 



254 FINANCIAL INSTITUTIONS 

equipment of their plant for larger profits. Credit is a con- 
venient means of exchange, and it is out of the exchange 
that the profit is to come, and not from the income in the 
form of interest on deferred payments. The bank, on the 
other hand, is organized for the purpose of making a profit 
on the purchase and sale of credit ; but the only kind of 
high-rate interest- bearing credit that it may safely handle 
and at all times maintain its own stock unimpaired are 
the short-time obligations of its customers. The observ- 
ance of this principle is a condition necessary to success. 
This is imperative, on account of the opportunity which 
is thus afforded the bank to press for payment claims 
which may become doubtful through the shifting fortunes 
of merchants. It is also to its advantage to maintain a 
constant flow of payments from its commercial credit as- 
sets due as a means of protecting its money reserve in 
case this is at any time threatened by those who hold 
deposit accounts. 

According to the report of the Secretary of the Treas- 
ury for 1899, the amount of capital stock paid in by the 
3,595 national banks (September T) was $605,772,970. The 
amount of money reserve actually held at that time was 
$4:87,524,937. But besides the capital stock paid in there 
were $248,449,235 of surplus and $102,066,430 undivided 
profits — a total capital fund of $956,288,635. It appears, 
therefore, that an average of only 51 per cent of the capital 
funds were actually held in money reserves, while against 
this money reserve there were outstanding $2,450,725,598 of 
individual deposits, and about $1,000,000,000 of deposits in 
other banks, $414,000,000 of the latter being with author- 
ized reserve agents. There were besides some $200,000,000 
of national bank-notes outstanding. Assuming that $400,- 
000,000 of the deposits in other banks were drawing inter- 
est, the credit sold by those banks from which an income 
was derived was over $3,000,000,000, or about six and 
one-half times the amount of money reserve actually held. 



THE COMMERCIAL BANK , 255 

The income-producing investments made in excliange for 
their own credit (deposits and notes) were as follows : 

Commercial paper $2,496,751,251 

Deposits in other banks on interest (estimated). . 400,000,000 
United States bonds to secure circulation 229,639,610 

Total $3,126,390,861 

If we may assume that the commercial paper averaged 5 
per cent, United States bonds 3 per cent, and interest on 
deposits in other banks 2 per cent, then the total annual in- 
come on these investments would be : 

Commercial paper $124,887,562 

Interest on bonds 6,884,188 

Deposits in banks on interest 8,000,000 

Total $139,721,750 

As stated before, the bank's income is not confined entirely 
to sales of its own credit. Besides being an investor, the 
banker is a merchant and broker — dealing in bullion, coin, 
bills of exchange, bonds, and securities. He is also an agent 
for the collection of bills and notes. He may likewise be a 
trustee. All of these functions, however, have to do w^ith 
money and credit in their uses as capital — with the financial 
operations and activities involved in the purchase and sale 
of goods ; out of them all comes the gross income of the 
bank, from which are to be obtained its expenses and profit. 



^%0 



CHAPTER XIII 

THE TRUST COMPANY 

A WELL-ORGANIZED systeoi of Credit involves a great 

many fiduciary relations. It is to give greater certainty 

and facility to the administration of these that the trust 

company is organized. To make the more common trust 

relations concrete, as well as the more common demands for 

their administration, let us recall the experience of a retired 

banker. At an advanced age he withdraws from cares and 

responsibilities of management ; he intends to devote the 

remainder of his life to the comforts of home and the care 

rn. • of his own properties and investments. He has 

The service ^ \ 

of the trust not been long in retirement, however, when an 
company. ^j^ friend asks to be allowed to insert his 
name in his will as executor. He consents. A few months 
elapse when the probate judge of his district approaches 
him. An estate has been in his court for several years ; 
the administrator, a son of the deceased, has not pushed the 
settlement as fast as his position demanded ; the other heirs 
complain not only of delay and waste, but also that the ad-^ 
ministrator has employed a portion of the assets for his own 
purposes ; on being cited to appear and render an account 
of his trust, he disclaims misappropriation of funds, but 
avers that his own business requires such a portion of his 
time that he can not give proper attention to the estate. 
The judge urges the banker's acceptance of appointment 
as administrator: to wind up the estate as rapidly as the 
interests of all parties will permit. Presently another trust 
256 



THE TRUST COMPANY 257 

is thrust upon him in such a manner that he can not refuse 
it. A neighbor has died, leaving an infant daughter. Bj 
will he had appointed the banker guardian of his child and 
trustee of his estate for her benefit. Decedent held in- 
terest in a number of industrial concerns ; these must be 
sold and settled and the proceeds invested in such a way 
that safe and sure income v^^ll be realized for the education 
and support of the child. It will be years before his ward 
will come to such an age that she will be competent to form 
business judgments of her own. In the meantime, if he 
accepts the trust, he will be held to account for the proper 
care of the estate as well as care of the child. 

One advantage is found in the administration of these 
tnists : they all call for the exercise of the same kind of 
conservative judgment, and they fit well into the banker's 
own business — investment ; he now finds himself quite as 
busy with his new duties as he had been before his retire- 
ment ; in fact, so fully employed is he in looking after the 
demands of trusts imposed that his occupation is growing 
irksome. Such demands, however, increase. The failure 
of a large private bank brings a further request for his serv- 
ices. The many creditors, as well as the court having the 
rjjj _ estate in charge, urge his acceptance of appoint- 

mies of the ment as receiver. They point out his special 

trust com- fitness : his acquaintance with the men and 
pany. . 

business firms involved ; his knowledge of the 

value of properties and securities held. An experience such 

as his seems indispensable to an equitable settlement. The 

parties concerned propose to allow him to employ such 

clerical service as he may wish, if he wdll but exercise the 

business judgment necessary to the proper adjustment of 

their interests. He accepts this trust also, but, in accepting, 

it becomes necessary for him to open a down-town office 

where he can be in regular attendance during a few hours 

each day and give attention and direction to affairs. Though 

clerical service is competent to manage the details, an ex- 

18 



^58 FINANCIAL INSTITUTIONS 

perienced and capable linancier must pass judgment upon 
all matters involving discretion. 

It is out of just such situations as this, such increasing 
demands for the competent management of trusts, that the 
first trust companies arose. The trust company is primarily 
an American financial institution. It was in this country 
that it had its origin. Ours was a new society and one in 
which business activity was a very prominent feature. In 
America there were comparatively few men of wealth and 
ability who belonged to what might be called an intelligent, 
thrifty, leisure class. But in Europe a large proportion of 
^ . . .., estates were held, and men found among their 
trust com- fellows those who had the time, intelligence, 
party. ^^^ financial standing necessary for the safe 

and successful managing of trusts. In America the con- 
servative, well-established, wealthy class — the class whose 
time and wealth were not involved in the turmoils of trade 
and the risks of business venture — was so far wanting that 
some specially created agency to perform these services be- 
came necessary to the establishment and maintenance of 
trust relations. But the necessity that gave birth to the 
invention provided us with a very superior instrument — a 
financial institution as far in advance of the old-time per- 
sonal trustee as the modern machine is ahead of hand labor. 

Quoting from the Revised Statutes of New York, the 

term trust company signifies "any corporation formed for 

the purpose of taking:, accepting:, and executing 
Methods of /^ ^^ ,^\ ^^1 ^' .^. ^ . .? 

organization ^'^^^ trusts as may be lawfully committed to it, 

—Legal steps and acting as trustee in the cases provided by 
necessary. -. „ rn • i • x* 

law. lo give a more comprehensive notion 

of the constitution of the trust company and of the care 

exercised in its formation, the manner of organization in 

that State may be described : " Thirteen or more persons," 

says the statute, "may form a corporation to be known as 

a trust company. Such persons shall, under their hands and 

seals, execute and acknowledge an organization certificate in 



THE TRUST COMPANY 259 

duplicate, which shall specifically state : (1) the name by 
which the corporation shall be known ; (2) the place where 
its business is to be transacted ; (3) the amount of its cap- 
. rp, ital stock and the number of shares into which 

organization the same is to be divided — at least $lUO,000 
certificate. jg required for cities containing less than 25,000 
inhabitants, $150,000 for cities containing over 25,000 to 
100,000 inhabitants, $200,000 for cities containing from 
100,000 to 250,000 inhabitants, and $500,000 for cities con- 
taining more than 250,000 inhabitants ; (4) the name, resi- 
dence, and business address of each member of the corpo- 
ration ; (5) the term of its existence not exceeding fifty 
years ; (6) the declaration that each member of the corpo- 
ration will accept the responsibilities and faithfully dis- 
charge the duties of a director therein if elected to act as 
such." 

After the acknowledgment of this organization cer- 
tificate, notice of intention to organize such a trust company 
2 ]\j- r f must be published at least once each week for four 
intention to consecutive weeks in a newspaper (to be designa- 
organize. ^^^ y^^ ^^le superintendent of banks) published in 
the city or town where the proposed company is to be located. 
" Such notice is required to set forth the names of the pro- 
posed corporators, the name of the proposed corporation, 
and the location of the same, as set forth in the organization 
certificate. If there is any trust company or trust com- 
panies organized and doing business in such city, a copy of 
such notice shall also be sent to each trust company so or- 
ganized and doing business at least fifteen days before the 
filing of the organization certificate." 

. . Within sixty days after the acknowledgment, 

office of Su- ^^^ ^'^ "tbe duplicate copies of the certificate of 
perintendent organization must be filed in the office of the 
County Clerk of the county wherein the trust 
company proposes to locate and do business. The other 
must be sent to the office of the Superintendent of Banks 



260 FINANCIAL INSTITUTIONS 

of the State, together with evidence of publication and 
service of notice before described. 

" If such certificate is in due form and duly executed 
according to law, and is accompanied by evidence satisfac- 
tory to the superintendent of the proper publi- 
tion ^ *^"' cation and service in good faith of such notice, 
he shall forthwith indorse the same over his 
official signature, ' Filed for examination,' with the date 
of such indorsement." 

" When the certificate shall have been filed, the super- 
intendent shall ascertain from the hest sources of informa- 

5 Examina- ^^^^ ^^ ^^^ command (1) whether the general 
Hon as to fitness for the discharge of the duties apper- 
^ ^^^^' taining to such a trust of the persons named in 
the certificate is such as to command the confidence of the 
community in which such trust company is proposed to be 
located, and (2) whether the public convenience and ad- 
vantage would be promoted by such an establishment." 

Further, " The Superintendent of Banks shall, before is- 
suing the certificate of authorization to any corporation, ex- 

6 Authori- ^^^^^^ ^^ cause an examination to be made in 
zation to be- order to ascertain whether the requisite capital 
g'm business. ^| g^^]^ corporation has been paid in cash ; and 
if it appears from such examination that such capital has 
not been fully paid in cash, the certificate of authorization 
shall not be granted and no such corporation shall com- 
mence business until such certificate of authorization has 
been granted. If so satisfied, he shall, within sixty days 
after such certificate has been filed with him for examina- 
tion, issue under his own official seal the certificate of au- 
thorization required ; . . . . which certificate so issued by 
him shall authorize the persons named therein to become a 
trust company as designated in the organization certifi- 
cate." 

When the certificate of authorisation is given by the 
Superintendent of Banks, the persons named and their 



THE TRUST COMPANY 261 

successors become a corporation, and in addition to the gen- 
eral powers granted to corporations within the State, have 
7 Trust *^^® following powers : (1) To be appointed and 

poivers to accept appointment of execntor or of trustee 

granted. under the last will and testament, for adminis- 

trator with or without will, in case of the estate of any de- 
ceased person, and to be appointed and to act as trustee of 
the estates of lunatics, idiots, persons of unsound mind, and 
habitual drunkards. (2) To take and execute any and all 
such trusts and powers of whatsoever nature or description 
as may be conferred upon or entrusted or committed to it by 
any person or persons, or any body, political corporation, or 
other authority, by grant, assignment, transfer, devise, be- 
quest, or otherwise, or which may be entrusted to it or trans- 
ferred to it or vested in it by order of any court of record 
or any surrogate, and to receive and take and hold any 
propei'ty or estate, real or personal, which may be the sub- 
ject of any such trust. (3) To take, accept, and execute 
any and all such legal trusts, duties, and powers in record, 
and the holding, management, and disposition of any estate, 
real or personal, and the rents and profits thereof, for the 
sale thereof, as may be granted or confided to it by any 
court of record, or by any person, corporation, municipality, 
or other authority, and it shall be accountable to all parties 
and interests for the faithful discharge of every such trust, 
duty, or power which it may so accept. (4) To act under 
the order of appointment of any court of record as guard- 
ian, receiver, or trustee of the estate of any minor, the 
annual income fj-om which shall not be less than $100, 
and as the depository of any moneys paid into court 
whether for the benefit of any such minor or other per- 
son, corporation, or party. (5) To accept trusts from 
and execute trusts for married women in respect to their 
separate properties and to be their agent in the manage- 
ment of such property, or to transact any business in rela- 
tion thereto. (6) To receive deposits of trust moneys, 



262 FINANCIAL INSTITUTIONS 

securities, and other personal property from any person 
or corporation. 

These we may call the general trust powers conferred. 
In addition, there are what may be styled the sjpecial trust 

powers, growing out of modern methods of 
powers. corporation finance, and trust service demanded 

in the organization and management of large 
business corporations. These are as follows : 1. The power 
to act as the fiscal or transfer agent of any State, munici- 
pality, body politic, or corporation, and in such capacity 
receive and disburse money and transfer, register, and con- 
sign certificates of stock, bonds, or other indebtedness. 2. 
The power to act as trustee under any mortgage or bond 
issued by any municipality, body politic, or corporation; 
and, 3, accept and execute any other municipal or corpo- 
rate trust not inconsistent with the laws of the State. 

To give effect to these trust powers, and enable the com- 
pany to manage the funds and properties entrusted to it in 

such manner as to make and secure and at the 
powerT^^ same time provide an income to beneficiaries, 

investment powers are conferred as follows : 
(1) To loan money on real and personal securities. (2) To 
purchase, invest in, and sell stock, bills of exchange, 
bonds, mortgages, and other credits. (3) When moneys or 
securities are borrowed, or received on deposit or for invest- 
ment, the bonds and obligations of the company may be 
given therefor. (4) To lease, hold, purchase, and convey 
any and all real property necessary in the transaction of its 
business, or which the purposes of the corporation may 
require, or which it shall acquire in the satisfaction or per- 
sonal satisfaction of debts due the corporation under sales, 
judgments, or mortgages, or in settlement or in partial set- 
tlement of debts due the corporation by any of its debtors. 
With these authorizations and grants of powers, the 
trust company, after equipping itself with officers and agents 
for the safe conduct of its affairs, is ready for business. 



TBE TRUST COMPANY 263 

The first trust companies organized did not have their 

powers so broadly or distinctly defined, nor did they need 

^, .J them. Before the development of modern 

of business of methods of corporate finance, before the 

trust com- orrowth of the present complex organization of 
panies. ^ . ^ r o 

business, only the general trust relations vrere 
prominent. Insurance companies were the first to under- 
take the administration of trusts in lieu of personal trus- 
tees. Gradually, however, as trust relations became more 
highly developed and more frequent, the business of hold- 
ing and executing trusts came to be specialized. Within 
the last twenty -five years trust relations and trust companies 
have been multiplied. The vast expansion of corporate 
methods of business, the advantages offered by the trust 
company in the service of business institutions for the 
registration and transfer of stocks and bonds, the practise 
of holding trust deeds and mortgage securities for bond- 
holders, of receiving assignments of property for the bene- 
fit of prospective corporations which are in the hands of 
promoters, and for the purposes of reorganization and for 
the execution of voting trusts, besides the many services 
which they are able to render as funding agencies, fiscal 
and transfer agents for public as well as private corpora- 
tions, in the underwriting and disposition of stocks and 
bonds and the disposition of moneys, the demand for such 
services has directed large investment capital and the best 
financial ability to the trust company. 

As investment agents, the trust company acts in a double 
capacity. In the first place, it acts as trustee for its bene- 
Double in- ficiaries ; in the second place, it has a large cash 
vestment capital of its own. The inducement to the in- 

vestment of money in the stock of the trust 
company — in making subscriptions to its capital stock — is 
apparent. The character of business judgment and of 
business enterprise necessary to the successful management 
of trust estates is the same as that required for the con- 



264 FINANCIAL INSTITUTIONS 

servative investment of the funds of its managers. Capi- 
tal, therefore, that is seeking first-class securities and invest- 
ments would be attracted to the stock of such an institu- 
tion. To return to the concrete : Let us suppose that A 
had $500,000 of investment funds of his own. The same 
considerations that would lead men with capital to invest it 
in the stock of a trust company would induce them as 
managers of the company to receive deposits from those 
who had funds to invest, but who were willing to take a 
relatively small income and be relieved of the risk and 
trouble of management. By offering 3 per cent for time 
deposits the trust company has exchanged its own credit 
obligation for funds deposited ; by virtue of its better fa- 
cilities for safe investment, the company is enabled so to 
invest these funds that they may yield from 4 to 5 per 
cent. This on a large line of deposit would also give it a 
handsome profit. 



CHAPTER XIY 

THE BROKER AND THE BROKERS' BOARD 

A BROKER is a special agent employed to make purchases 
or sales for another — his principal. Mr. Wanamaker wishes 
to borrow $500,000 for sixty days, with which to make pay- 
ment on a cargo of goods received from Paris. JNo one 
person or bank would at the time have that amount of 
funds free for investment in sixty-day paper; moreover, 
from considerations of safety, it is the policy of banks and 
other note-buyers not to have a large proportion of their 
funds invested in the paper of one person or business firm. 

To find purchasers for this amount of paper on 
b^oVer!^' favorable terms would require Mr. Wanamaker 

to leave his business house and spend time else- 
where which he might profitably use in his ofiice. Instead 
of doing this, he goes to a note-broker — a man who makes 
it his business to find customers of this kind, one who keeps 
in touch with the note-buying constituency. The broker 
knows the kind of paper that the banks and other note- 
buyers usually take, and about how much ; at this time, in 
fact, he may have a lonsc list of buvers' wants scheduled on 
his books. For a small commission he undertakes to sell 
the notes for Mr. Wanamaker. Turning to the orders of 
buyers scheduled on his books, he first satisfies these by 
setting apart enough to fill them. Let us suppose that he 
already has customers for $200,000 of this kind of paper. 
He then takes down his " 'phone," and, by calling up one 
prospective buyer after another, has the whole remaining 

265 



266 FINANCIAL INSTITUTIONS 

amount disposed of in half an hour. His delivery clerk 
is then sent out with the notes, who, in exchange, brings 
back customers' checks, which are deposited ; thereupon re- 
mittance of the amount of funds desired is made to Mr. 



^^^ >^/ ^.^/P^ 







i*^^ 



Wanamaker for settlement with his Paris house. The 
notes usually handled by commercial paper brokers for 
large houses are made in uniform amount of $5,000 each. 
They are drawn to the order of the " maker," and with- 

LETTER OF RELEASE. 



Philadelphia, 189 

^or nnd in COnsiderntion of the sum of one dollar, to us in hand paid, the receipt 

whereof is hereby acknowledged, „ 

agrees to release, and hereby does release, — 

from all liability cw endorsers on a note of. , : 



dated _„ - in the year eighteen hundred and ninety- — - — 

due— in the year eighteen hundred and ninety- 



for Dollars, 

and the said- further agrees to hold the said endorsers 

harmless on said note. 



out indorsement are what is known as one-name paper. 
When not executed to the order of the maker and a dealer 



THE BROKER AND THE BROKERS' BOARD 



267 



wishes to protect himself, he secures a release from respon- 
sibility on indorsement. The manner of conducting a 
transaction through a " commercial paper house " is illus- 
trated by the following statements of account : The first 



7^ 



>:?^ 



'^^ 










't^^/? 



represents that Bodine, Altemus & Co. on May 29, 1902, 
bought of John Smith & Co. a note executed by John 




/^J^':^^^ 



W^y^ 







Jones & Co., bearing interest at 4^ per cent, due Septem- 
ber 30, following ; that the note runs 125 days, which 



268 FINANCIAL INSTITUTIONS 

at 4:^ per cent amounts in interest to $104.17. Allowing 
for discount and commission, the total deduction to be made 
from the fall of the note equals $y0.63. This leaves a net 
cash payment of $4,909.37 on purchase of the note. The 
second statement is one of sale bj Bodine, Altemus & Co., 
by which it appears that the terms were exactly the same 
as those of purchase, except that $12.50 is added for com- 
mission. 

Upon receipt of the $500,000 in funds — the proceeds 
of the note sale — Mr. Wanamaker has another problem to 
solve, viz., " How is this amount of money to be transmitted 
to Paris " ? This may be done by drawing that amount of 
gold out of the bank in I^ew York where his account is 
kept, and sending it by express to the parties from whom 
purchases of goods were made. This would cost him $1 
per thousand or $500 for transportation charges. If $500,- 
000 of the bills of New York merchants against 
h'wk&ry^' merchants of Paris can be found, he may buy 
these and then send them to his Paris banking- 
house for collection. By so doing the cost of transporting 
gold to Paris would be avoided ; at the same time the Paris 
merchants would avoid the cost of sending a like amount 
of gold back to I^ew York. The matter of finding such 
bills against Paris merchants is given over to an exchange- 
broker. The exchange-broker, who has a constituency that 
have foreign bills for sale, telephones around from place to 
place, and within a short time has the desired amount. 
For a commission amounting to a small fraction of the cost 
of shipping gold, $500,000 of good trade bills are obtained. 

After the goods have been sold, Mr. Wanamaker may 
have $100,000 that he has no immediate use for in his busi- 
ness, and he decides to invest the amount in stocks and 
bonds. Looking over the securities of companies on the 
market, he makes up his mind that Chicago, Burlington 
& Quincy Consolidated 7 ^ of 1903, @ 102, Chicago & 
Northwestern Sinking Fund 6's of 1929, % 115, and 



THE BROKER AND THE BROKERS' BOARD 269 

Central of New Jersey, common, @ 150, will make good 
investments if they may be had at the prices named. But 
he does not know any one who has any ot these for sale at 
these prices. To obtain these investments he leaves an 
order with a stock- and bond -broker. The order 

hrol-el^^^^' ^^ *^ ^^y ^^y ^^ ^^^ stocks or bonds on the 
market at the prices named. At the time that 
the order is given none of them may be offered at the 
price ; but within two weeks the money market becomes 
close, and some of the holders of securities are willing to 
sell at such figures that the order may be executed. The 
broker charges ^ of 1 per cent for his services on delivery. 

Again, Mr. Wanamaker, being interested in a textile 
factory at Worcester, may wish to purchase a stock of cot- 
ton for the year. He has contracts for cloth to fill, and 
desiring to take advantage of a present market for mate- 
rials for manufacture, he places an order with a cotton- 
broker for 500 bales at 5 cents per pound. In like man- 
ner, a person desiring wheat or corn will go to 
broker.^ "^^' a grain -broker ; another, desiring petroleum, will 
go to an oil-broker ; one wishing to lay in a 
supply of coal may deal with a coal -broker, etc. Any 
property or commodity that has a central market may be 
the subject of a broking business. 

The business of broking has given rise to a peculiar 
form of institution known as a Brokers' Board. In early 
days the stock- and bond-brokers did business in much the 
same way that coal-brokers or real -estate- brokers do to-day. 
On receiving a consignment for sale they would go out on' 
the street to find purchasers ; or, receiving buying orders, 
they would go about from place to place to find owners who 
had stocks and bonds of the kind wanted, and which might 
be obtained at the prices offered. The result of a morning's 
canvass, however, might give but small return. Coming to 
the coffee-house for luncheon, they would meet other brokers 
who also had buying and selling orders. It was found by ex- 



270 FINANCIAL INSTITUTIONS 

perience that more business could be transacted at luncheon, 
or during a half -hour meal-time smoke with brokers than by 
a whole day's canvass. The advantage of bringing together 

the buying and selling wants of a community 
Board.^ ^^^ ^* ^ meeting of brokers caused them as by 

common consent to meet at a central coffee- 
house to transact their business. But this was oftentimes 
unsatisfactory on account of the unreliability of some of the 
traders. The result was that, as business increased, an asso- 
ciation was formed with rules governing it which would 
insure honorable dealings among members, and at the same 
time give to each member the advantage of meeting the 
leading brokers of the place. 

The Philadelphia Stock Exchange had its beginning at 
a coffee-house. The sales of Government bonds and of 
„-. , stocks in the newly organized companies after 

of stock the close of the Revolution was the business 

exchanges. which brought it forth. London stock-broking 
began with the foundation of the national debt under Wil- 
liam and Mary. Large corporate trading companies had 

been organized before this time, but the stocks 

1. Phila- were not traded in to such an extent as to ffive 
aelpliia. . , ^ 

rise to a regularly organized broking business. 

With the flotation of the bonds issued for the purpose of 
raising funds to carry on the wars against France, and the 

c, rri. T appeals made to the public for investment in 

2. The Lon- / ^ ^ n . i i . t i i . 
don Stock these stocks, stock-]obbing became a regular busi- 

Exchange. ^^^^ ^^ London. This was soon followed by the 
flotation of shares in companies organized for taking advan- 
tage of the new territory made free for British exploitation 
after the success of the Enghsh armies on the Continent. 
The South Sea Bubble was only one of the projects that 
gave rise to the issues of shares which flooded the London 
market and made the business of broking one of the most 
important branches of enterprise established in the eight- 
eenth century. The London brokers first found rendez- 



THE BROKER AND THE BROKERS' BOARD 271 

vous in the Eojal Exchange, a building erected during the 
reign of Elizabeth as a meeting- place for merchants. In 
1698 these quarters were found too small, and were conse- 
quently abandoned. For a number of years brokers col- 
lected in a place made famous by them, which has since 
been known as " Change Alley." A coffee-house opening 
on this alley was their favorite retreat for social and finan- 
cial chat. The New York brokers found their first central 
meeting-place at what has gone down in history as the 
" Tontine Coffee-House," at the corner of Wall and Water 
Streets. 'New York, like Philadelphia, early became a 
center of financial interest and, with this, for the business 
of stock-broking. Much conflict had grown out of the va- 
riety of commissions charged in the early transactions and 
H Th JSr ^ the irregular dealings of brokers. The begin- 
York Stock ning of the New York Stock Exchange dates 
Exchange. from a meeting of 24 brokers under a tree 
which grew opposite No. 60 Wall Street. This agreement 
is dated May 17, 1792, and is one providing for uniform 
commissions among the contracting parties. The force of 
such an agreement was to control the market, since the 
signers confined their trading operations to those who would 
conform to it. It was not until 1817, however, following 
the growth of corporations after the War of 1812, that a 
formal organization was effected. As business increased, 
with the floating of bank, canal, and railroad stocks, the 
outside brokers organized what was known as the " Open 
Board of Brokers." This was absorbed by the IS"ew York 
Stock Exchange in 1868, membership in the latter being 
increased to accommodate that of the older organization. 
During the civil war a special class of business grew out 
of the necessity for gold purchases and gold sales for for- 
eign trade, and for the payment of the obligations of the 
Government. The " Gold Board," as the association of 
brokers having charge of this class of business is called, was 
incorporated as a part of the Stock Exchange in 1879. 



272 FINANCIAL INSTITUTIONS 

Later the New York Mining Stock Exchange was estab- 
lished, to accommodate the business growing out of the 
speculative mania for mining shares in the '70's ; and with 
the discovery of Leadville and other Colorado districts, a 
second board, called the American Mining Stock Exchange. 
The decline of the popularity of mining stocks forced these 
bodies to look for some other branch of business. The fast- 
growing demands for petroleum gave them an outlet. In 
1885 the two mining exchanges consolidated 
soUdated ^''^'^ ^^ ^^^ Petroleum Exchange as the Con- 
Stoclc and solidated Stock and Petroleum Exchange. New 
:^troleum York therefore has two large stock exchanges 
as meeting-places for brokers handling this 
class of purchases and sales. Not all the business, how- 
ever, is done on the floors of these two boards ; a large 
amount is transacted " on the street," as it is called — that 
is, the brokers not having membership in these organiza- 
tions will come together as of old at some customary place, 
and on the sidewalk or in the street they will bicker and 
trade, thus making exchanges for their customers. 

A stock exchange need not be a corporation. The New 

York Stock Exchange, for example, is only a voluntary 

^ ... association of members. It must, however, be 
Organization . . ' ' 

of a stock well organized. It must exercise complete con- 
exchange. ^p^j ^y^j. h^q^q ^]^q enjoy its privileges, for it 
is out of the regularity of transactions that its advantages 
accrue. In the New York Stock Exchange there is a 
membership of 1,100. As the membership is full, one may 
obtain a seat only by purchasing it from a member. One 
can not become a member, however, until he has passed the 
most careful scrutiny of the Membership Committee re- 
garding his credit, his financial responsibility, his business 
association, his reputation for honesty and fair dealing. In 
addition to the usual incentive for honesty in business, 
therefore, the stock -broker has the price of his seat as well 
as his whole opportunity for doing business staked on ob- 



THE BROKER AND THE BROKERS' BOARD 2Y3 

servance of business propriety and honorable conduct. E"o 
other class of men has the quality of business honor so high- 
ly developed. For contracts involving millions of dollars, 
only individual pencil memoranda are made, and deliveries 
of securities and remittances are conducted on these mem- 
oranda with the utmost confidence that contracts concluded 
by "finger-talk" will be fulfilled without question. The 
only possibility considered by members of the board is one 
of mistake, and as a precaution against this, an office clerk 
is sent out at the end of each day's business to compare 
notes with houses dealt with, upon comparison of which 
errors made are corrected without conflict or controversy. 

For illustration of plan of organization, the Philadel- 
phia Stock Exchange may be used. At the head of the 
. ,. Philadelphia Stock Exchani^re is a president, 
of the Fhila- who opens and closes the board at the regu- 
ddphia larly prescribed time ; he preserves order, an- 

nounces failures of members, gives notice of 
contracts unfulfilled, and attends to their execution under 
the rules of the board. The board opens at 10 a. m. and 
closes at 3 p. m. Deliveries must be made before 2.15, ex- 
cept on purchases and sales for cash. The board has vari- 
ous committees to look after different departments of busi- 
ness and to see that its rules are properly complied with. 
These committees are as follows : 1. A Governing Commit- 
tee, consisting of 21 members, one-third of whom retire 
each year. This committee has general supervision of the 
affairs of the association, and is the court of final resort. 
2. A Finance Committee, consisting of 5 members, which has 
charge of the funds of the exchange and the investment of 
any surplus funds in the treasurer's hands. 3. A Build- 
ing Committee of 3 members, which has supervision and 
control of the home of the board — has charge of repairs, 
service, etc. 4. A Committee on Admissions, consisting of 
5 members, to whom all applications for membership, for 
transfer, or re-admission of suspended members are re- 
19 



274 FINANCIAL INSTITUTIONS 

ferred. 5. An Arbitration Committee, consisting of 7 
members, whose duty it is " to investigate and decide all 
claims and matters of difference between members of the 
exchange which may be brought before it, arising from 
transactions in bonds, bullion, stocks, or other securities, or 
from any transactions in money." This is one of the most 
important committees in the organization ; it serves as an 
inner court, so to speak. Like the courts established for 
the government of the old incorporated trading companies, 
it so far controls the conduct of members and arbitrates 
differences between them that it is seldom any matter of 
controversy gets before the regular courts of law. Upon 
their decisions are built up rules and precedents which 
constitute a code for business transactions, and which by 
practise and common consent regulate the practises of 
those outside of the board and find a final place in the 
written decisions of the courts of record. 

By reference to the plan below, an idea may be had of 
the floor arrangement of a board. A large part of the 

floor space is encumbered with nothing but 
ranqements'' what are called trading-posts. These, as the 
and office ap- name suggests, are posts set up on the floor 
oThrokers! around which certain kinds of stocks may be 

traded in ; as, for example, one post may be for 
railroad stocks, another for iron and steel stocks, another 
for municipal bonds, etc. (see posts numbered 1 to 8 in 
illustration). One having stocks or bonds for sale wishes 
to " offer " them on the general market ; to this end he 
will go to the post where such stocks are traded in and 
cry out his " offer "; or if he wishes to purchase stocks, 
he may go to another post and shout out his "bid." It 
is this auctioneering and bidding on the floor of the 
board around these posts, or, in the case of a produce ex- 
change, in the " pits," that causes the uproar so often re- 
marked upon. The board is simply an auction-room, in 
which every member is an auctioneer as well as a possible 



THE BROKER AND THE BROKERS' BOARD 



2Y5 



customer. As a board is a central point to which are 
brought the buying and selhng demands of a great city or 
of a country, on the floor of the board may be heard the 
concentrated outcries and 
the uproar of auctioneers 
of the many places which 
otherwise would be dealing 
in stocks and bonds ; it is 
this that makes a board- 
room seem so much like 
bedlam. On the floor will 
be found the brokers rep- 
resenting leading houses. 
At one side of the room 
are private boxes, in which 
will be found the clerks or 
operators, who have direct 
communication with the 
ofiices of members trading 
on the floor. From these 
priv^ate boxes the business 
of the offices will be com- 
municated to the floor- 
man, and purchases or sales on the floor will be returned to 
the several offices. On the wall of the Philadelphia Ex- 
change, beside the president's chair, is also an electric indi- 
cator, on which will be found consecutive numbers repre- 
senting the various trading numbers of members on the 
board floor. When a member on the floor is wanted, a 
button is pressed and a light flashes out the number of this 
member, to which he at once responds. The member on 
the floor, therefore, has to have his eye constantly turned 
toward the indicator as well as keep in mind the whole trad- 
ing situation on the floor ; besides, he must keep in touch 
with the business demands of the office. When business is 
brisk this is a difficult part to play. On a side-wall of the 



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276 FINANCIAL INSTITUTIONS 

board-room will be recorded the transactions (purchases and 
sales) of the local market, as well as those of other leading 
boards. 

The facilities for business and the business transacted 
on the several boards are very largely dependent upon the 
Organization organization of the broker's office. Customers 
ofthebro- are not allowed on the floor of the board. 
ker's office. rjr^^^ ^^^ ^^^^^ -^ ^^^^ ^^^^ ^^^^^ broker. In 

what is known as a board-room (see page 278), usually in 
the rear of the broker's office, are tickers, which give the 
quotations and the transactions on the several markets 
almost as soon as the business itself has been completed. 
The customer, therefore, is in possession of the facts of the 
market practically as soon as the broker himself. He is 
also in touch with the office members of the firm ; the orders 
of customers for purchase and sale come in from all parts 
of the country to the central market. 

Considerable of mystery surrounds the name broker. 
This is partly due to the fact that the ordinary individual 

„, does not employ a broker to make purchases 

The specu- _f_ i . i ^ 

lative side of and sales. W hen he wishes to purchase, he 
broking, g^^g ^^ ^ merchant — i. e., one who has for sale 

a stock of things desired. When he wishes to sell, he sells 
directly to a purchaser without the intervention of a special 
agent. The mystery associated with the name is in a meas- 
ure due to the fact that a considerable part of a broker's 
constituency is made up of speculators. The facilities given 
to making purchases and sales, the arrangements for the 
distribution of market quotations and transactions on the 
various central boards, bring with them a class of dealers 
who endeavor to obtain an income from taking advantage 
of market fluctuations. 

It is this that distinguishes speculation from investment. 
An investor is one who purchases a property or business 
interest outright as a result of judgment based on "what 
the concern has earned." His profits may come from 



THE BROKER AND THE BROKERS' BOARD 277 

a rise in value of the property, or from income in the form 
of interest or dividends, but in the last analysis it is depend- 
^ . , . , . ent upon the income or prospective income of 

Distinction ^ ^ ^ 

between in- the property, ihe speculator, however, cares 

vestment and ^^^ what may be the income-producine: power 

speculation. . •^. j- ^ • ah 

or earnmg capacity oi a business concern. All 

that he is interested in is a market fluctuation ; it makes 
no difference whether the property becomes more or less 
valuable — w^hich way the fluctuation may go — so long as 
he may place himself in a position to take advantage of 
the rise or fall. Since this is the end, and what one may 
call his business, it is, usually, not to his advantage to pur- 
chase and pay for the property. He would so use his 
trading capital that he may control as large a block of stock 
or other property as is possible for the purpose of getting 
the benefit of the change in price. He therefore buys 
on a margin — a margin sufficient to give him. control for 
such a time as, in his judgment, will allow of a fluctuation 
in his interest. It is this kind of buying that gives rise to 
a large part of the business of broking. It is to this class 
of transactions also that much of the financial uncertainty 
and misfortune of the past and the present is attributable. 

If one should go to a broker's office day after day, there 
will be found a constituency in the chairs of his board- 
rpj^g room, or going in and out, who keep an eye on 

speculative the market to which may be traced a very large 
constitnency . , . _f« i • i rm_ • i • i_ 

portion 01 his orders, ihe manner m which a 

market may be affected by these speculative purchases may 
be seen from a glance at the chart on page 280, which shows 
the organization of a single broker's business. This map, 
or sketch, represents the private wires connecting the vari- 
ous offices of a single concern over which streams of orders 
flow into the main office for execution and which find their 
way into the general pool on the board-floor. When fluctu- 
ations are great then trade is brisk. This is a common 
observation. Yet this trade is very largely a speculative 



THE BROKER AND THE BROKERS' BOARD 279 

one, and as fluctuations rise and fall, the capital which is 
used for speculative margins becomes gradually absorbed. 
The test of one's ability to remain in the speculation is 
found in his ability to keep his margins good. With these 
speculative orders pouring in there is a constant flow of 
capital toward the financial centers, which finally find their 
way into the conservative financial institutions. The capi- 
tal drawn from the purses of the speculating multitude finds 
final employment at the hands of the few who have the 
prudence and judgment necessary to conservative commer- 
cial and industrial undertakings. 

As a means of accommodating speculators who are unable 
to trade on large margins and yet who are anxious to gam- 
ble on the turn of the " wheel of fortune " in 
shoD ^'^ ^ ' *^^ market, a class of business has been organ- 
ized which has its center in the " bucket-shop." 
This is nothing more nor less than a room in which quota- 
tions are given representing the fluctuations of the market 
which allow one to take chances on price movements. In 
this it does not differ from the regular speculative busi- 
ness in the broker's ofl3.ce. The methods differ, however, 
in that the ones conducting the oflSce or " bucket-shop " are 
not in any manner regulated by a board, that they do not 
have their commissions determined by association rules, and 
that they take margins of any amount. Instead of having 
a wire or ticker that gives the oflScial quotations of the cen- 
tral markets in a language that may be understood, and that 
is open to inspection, the bucket-shop has a private wire 
over which quotations are received by a telegraph operator. 
These communications may not he read by the customer, as 
in the case of the ticker, and therefore the operators are the 
only ones that have a knowledge of what is going on. At 
one window, therefore, will be a margin -taker — one who 
takes the money of customers and records the chances taken. 
The customer will then take a seat in the room and watch 
the board for movements in his stocks. Thus gambling in 



THE BROKER AND THE BROKERS' BOARD 281 

'New York Central the stock goes up two points. The man 
who sits at the instrument, beside the clerk who has re- 
corded his bid, calls out to the boy at the board what JS'ew 
York Central is doing. The office has it entirely within its 
own power to say whether ]^ow York Central goes up or 
down. The customer, therefore, is in a gambling-house 
which plays with loaded dice. In case there are others in 
the game who have up more money on the fall of New 
York Central than he had upon its rise, the returns will 
probably be declared in his favor. If the conditions be 
otherwise, he may have his margin " wiped out," and he 
will then be left to reflect upon whether he will " try the 
market again." 



CHAPTER XIY 

THE INSUEANCE COMPANY 

In previous chapters the nature of contracts of security 
has been fully discussed. Contracts of security for the 

payment of credit obligations are specialized 
n-F ^oJ^t^nlHo forms of insurance. No better illustration of 

concrete insurance may be found than the 
forms of personal security heretofore discussed as indorse- 
ment and guarantee. Morgan has taken notes from Gates 
for the payment of $300,000, with interest at 5 per cent 
per annum. He offers to sell these to Drexel for $305,000 
— terms satisfactory — provided that Morgan will guarantee 
their payment. The guarantee of Morgan is a contract 
insuring Drexel against loss on account of default in the 
payment of the notes by Gates when due. An insurance 
policy is a contract wherein the insurer takes the risk in- 
cident to the happening of some event which will involve 
a loss. 

The risk on which a policy is taken out may be the 
non-payment of a credit instrument. A concern whose 

business it is to issue policies on such risks is 
insurance called a Credit Insurance Company. A good 

example of such a concern is the American 
Credit Indemnity Company of I^ew York. During the 
year 1900 this company took risks on $15,229,031 of credit 
contracts, for which it received premiums to the amount of 
$453,420. Its losses paid were only $75,352—1. e., about 
one-half of one per cent of the risks taken. A wholesaler 
.383 



THE INSURANCE COMPANY 283 

has an opportunity to sell a bill of goods on ninety days' 
credit to a retail house that is not well known to him. He 
recognizes a profit in the transaction, but does not care to 
take the risk of losing the account ; he therefore takes out 
a policy from a credit company which is in the nature of 
an indorsement of the credit of the retail concern. To 
obtain such a policy the wholesale house will make a state- 
ment or an exhibit of its books, indicating the average 
loss sustained during the last five years by failure of pay- 
ment of credit accounts. This rate or proportion is taken 
as a marginal allowance or " self -insurance " — i. e., the 
wholesale house will carry its own risk equal to the average 
for the last five years. In consideration for the premium 
paid, the credit insurance company steps in and carries the 
risk in excess of this amount. The company may require 
that the house shall sell to concerns only which have a com- 
mercial rating specified in the policy ; moreover, it may 
grade the premiums according to the ratings of customers. 
A similar form of insurance is that undertaken by com- 
panies in guaranteeing the accounts of building contractors 
in house-building operations. Instead of putting the re- 
tailer or contractor to the annoyance and necessity of hav- 
ing some friend guarantee his account, the wholesaler or 
house-owner pays to the insurance company a premium as 
consideration for the risk undertaken, and then makes this 
a part of the purchase price. For the insurance company 
to have undertaken a single risk would have been as dan- 
gerous as for an individual to have guaranteed the credit. 
Perhaps the loss of $75,000 incurred by the company above 
referred to in the course of its year's business grew out of 
six or seven contracts. If separate individuals had under- 
taken and sustained these losses it might have endangered 
their business and brought them to a condition of insol- 
vency. The insurance company, however, suffered a loss 
on only one risk out of each five hundred taken. As shown 
before, the premiums received from the four hundred and 



284: FINANCIAL INSTITUTIONS 

ninetj-nine far exceeded tlie amount lost on the one policy 
where credit payment was not made. In fact, the pre- 
miums received by the company during the year exceeded 
the losses by $380,000. It is in the multiplicity of risks 
taken and the experience of business men as to the propor- 
tions of losses to risks taken, that a basis for conservative 
judgment is found ; it is from these factors that proba- 
bility of loss is determined. 

A highly specialized form of credit insurance is the 
Security Insurance Company. In this the policy is one of 
The Security reinsurance of secured credit. The contracts 
Insurance of security to credits issued are entered into to 
Company. protect purchasers of credit instruments against 
loss from non-payment. These credits, together with their 
contracts of security, which are given to assure the pay- 
ment of the credit obligations, are then taken to a security 
insurance company, and, the risk being a satisfactory one, 
a policy is issued whereby the company undertakes to in- 
demnify the owners of these secured credits against any 
loss uncovered by the contracts of security. In other words, 
the insurance company guarantees that the security is suffi- 
cient to indemnify the owner of the credit contract against 
loss from non-payment. The Bond and Mortgage Guarantee 
Company of Brooklyn is a concern of this kind. 

A holder of secured credit, however, may feel entirely 
safe in the value of the property against which his contract 
of security runs — that is, his judgment may be 
insiirance *^^^ ^^^ property against which he holds a lien 
may be adequate to provide funds with which 
to pay the credit claim held by him in case the debtor 
should fail to meet his obligation when due. The only 
element of uncertainty may be one of title. He is not in 
a position to judge whether or not the party executing the 
mortgage has a perfect title to the property against which 
the lien is given. As a means of assuring himself of this 
he lays the transaction before a title insurance company — a 



THE INSURANCE COMPANY 285 

concern whose business it is to search titles and to take 
risks of loss for failure of title, and to pay the expense of 
defending adverse claims. Upon investigation, a policy is 
issued and the holder of the mortgage is placed in a posi- 
tion of increased security. Such insurance is more often 
taken out by purchasers of real estate. A company of this 
kind usually maintains a complete set of abstracts of title 
to the real estate in the district where risks are taken by 
them. Being in a superior position to pass judgment on the 
nature of the risk, it may olfer a low rate of insurance to 
the customer and at the same time protect itself against net 
loss by the receipts of premiums in excess of the amount 
paid out on policies. To illustrate : The German- American 
Real Estate Title Company of New York sustained losses 
of only $25 for the year 1900, while during that time it 
received in premiums $17,668. The title losses of this 
organization from the time of its organization have been 
only $4,778, while the total premiums received by the com- 
pany have amounted to $598,761. The rates of insurance 
offered to the public are so low that one taking lien security 
or purchasing property outright can well afford to take out 
a policy which will guarantee him against individual loss ; 
while by apportioning the losses of the few individuals 
among the many insured, the company is enabled to pay 
expenses of administration, maintain a large title plant, 
and have for itself a remainder in profits amounting to 
something like 7^ per cent per annum on the capital in- 
vested in the business. 

There may be as many different kinds of insurance as 
there are forms of risk. Insurance concerns are organized 
Different around risks incident to honesty or business 
forms of fidelity ; to injuries sustained in travel ; acci- 
^^^ ^' dent to persons employed in factories or other 

hazardous callings ; to sickness, casualties, and death ; to 
risks of loss to property from fire, wind, lightning, water, 
burglar}^, breakage of glass ; to dangers to vessels and car- 



286 FINANCIAL INSTITUTIONS 

goes at 6ea, etc. The associated companies known as tlie 
Llojds recently gave a notable illustration of the extent to 
which risk undertakings may be applied. For the corona- 
tion of King Edward YII many millions of dollars were 
to be spent in decoration and in preparation for popular 
spectacles, on which the financial return depended upon 
chances of weather, the health of the sovereign, and many 
other fortuitous circumstances. Before undertaking busi- 
ness of this kind — before building the temporary stands for 
spectators, placing decorations of flowers, and arranging 
displays of perishable goods that depended. upon the occur- 
rence of the event at a certain hour and place — business 
conservatism suggested the shifting of the risk to concerns 
whose business it was to undertake hazards and to distribute 
loss to individuals over the profits of the many and make 
them a charge against such profits. Policies on this event, 
it is said, were written to an amount exceeding $50,000,000. 
The variety of risks undertaken and the contracts made to 
cover loss may be illustrated in another way. In the single 
line known as life insurance, there are issued by the several 
hundred companies in existence something over 150 different 
forms of policies, each of which is a slightly different form 
of undertaking. When we consider the various classes of 
risks around which insurance has been organized, and the 
various forms of undertaking within each class, the mag- 
nitude and complexity of the business can scarcely be com- 
prehended. 

Every individual insurance policy or contract is a spec- 
ulation. It is a speculation of the most fortuitous kind — a 
T J' -J 7 form of risk that a conservative business man 

IndvviduaL 

risk and does not wish singly to undertake. In consid- 

speculahon. oration for a premium (a very small portion of 
the amount involved in the risk), a company undertakes to 
become responsible for loss in event such loss occurs. The 
company is in no better position, perhaps, to estimate with 
business certainty the happening of an event which will 



THE INSURANCE COMPANY 28Y 

entail loss than is the individual himself. Each individual 
risk is a speculation to the company in the same sense as is 
a margin deal in a bucket-shop to the margin taker. 
^N^either margin giver nor margin taker can tell which way 
the market will go ; neither can comprehend to an extent 
which will enable him to make a conservative judgment the 
facts and forces which affect the market. Both of them 
are certain, however, that there will be fluctuations in mar- 
ket price. If the price of the stock dealt in goes one way, 
the bucket-shop will get the margin ; if the fluctuation is 
in the other direction, the transaction yields a return to the 
customer. If it were possible to mark out the course of 
the market for the future ; if any individual could procure 
the data of business and could so well understand it as to 
allow him to make a conservative estimate, then for him a 
purchase would not be a speculation. It is here proposed 
to show by what method the uncertainty of individual risk 
is reduced to a collective certainty — in other words, how 
the speculation of business life is largely reduced by the 
application of the principle of collective insurance. 

Each individual risk is based on a highly speculative 
uncertainty. For this no data may be procured by which 

a conservative iude^ment may be made. Busi- 
inmrance ^^^^ experience, however, has shown that 

among risks of a certain class the percentage 
of loss is a fairly constant one. For example, no one can 
tell what hour a particular building will be consumed 
by fire; lightning may strike it; spontaneous combus- 
tion may take place in some part where shavings have 
been left by the carpenters and water has entered, caus- 
ing fermentation and chemical decomposition ; a mouse 
may have taken a match to its nest and striking it with his 
teeth may ignite the structure ; a lamp may be exploded ; 
an electric wire may emit a spark ; a hundred possibilities 
are present, any one of which may result in fire entailing 
total loss. While this is true of each and every building 



288 FINANCIAL INSTITUTIONS 

in a city, it has been found by experience to be quite as 
true that among all buildings of a certain class, constructed 
of similar material, existing under similar conditions, the 
percentage of fires that occur within a given time— let us 
say a year — may be relied on. Among buildings of one 
class, one out of a thousand will burn down each year. 
This experience gives to the business man the basis for a 
conservative estimate — an estimate on which he can make 
a calculation of aggregate loss that serves as a foundation 
for one of the most conservative of financial institutions, 
the insurance company. With each class of insurance the 
problem for the manager or organizer of the company is 
one of so adapting its capital and its income as to be able to 
meet such losses as occur on the risks that his company has 
undertaken. With each class of business this adjustment 
must be a different one, and must be based on experience 
that lends itself to a calculation that amounts to a business 
certainty. But having made such an arrangement, he may 
offer to those members of the community who may suffer 
from individual loss a perfect security based on the collec- 
tion of sharing results. If the manager of the company 
fail in such adaptation, or provision made for payment, then 
he is holding out an inducement that may lead his customer 
into a snare. 

There is nothing more uncertain than the continuance of 
life in an individual, yet this uncertainty and the risk attend- 
The principle "^^ ^^^® have been reduced to a problem of busi- 
of life ness certainty in the organization of the life-in- 

insurance. g^rance company. In 1654 Pascal and Fermat 
evolved the mathematical doctrine of probability, and in 
1671 De Witt applied this to the probabilities of human 
life. It remained, however, for later years to establish 
from well-kept records and classified statistics the ratio of 
death incident to those living under definite conditions — a 
ratio which would serve as a premise for the application of 
the theory of mathematical probability to life insurance. 



THE INSURANCE COMPANY 289 

The result is what is known as the mortality tables. These 
are the niathematical conclusions, based on experience, as to 
probability of death among various classes of men. While 
the life of an individual man, therefore, is uncertain, yet it 
may be counted upon as a certainty that 15 deaths will occur 
among a thousand men twenty-one years of age who, at 
the time risks are taken, are termed " healthy lives." As- 
suming that a company were to issue one thousand policies 
on a class of lives on which, as a business certainty, 16 poli- 
cies would have to be paid the second year, 17 the third, 
and so forth, the number of deaths would increase each year 
until the remainder had been reduced by the deaths of 
something like twenty years, when the annual mortality 
would decrease. Finally, the probability is that between 
the ages of 90 and 100 years the last of the one thousand 
would be dead. 

To apply these results in such a way as to cause those 
who live to share the losses on those who die is the problem 
TJie^natural ^^ ^^^® insurance. For this purpose two meth- 
premium" ods are generally employed. The first is that 
^"^hvel pre- known as the " natural premium " or assessment 
mium'' plans, method, which implies that upon the death of 
each member of a society or group of insured, those who 
still remain in the society or group will contribute a p7'o 
rata in order to pay the death losses on those who have 
died. If each of one thousand takes out a policy for $1,000, 
if these are young lives, and if during the first year only 
three out of the thousand die, than an assessment of $3.01 
on the 997 remaining will be sufficient to pay the death 
claims. Leaving out of consideration expense of adminis- 
tration, etc., the purely assessment plan is an application of 
the principle of pro-ration of loss among survivors. The 
success of such a plan depends therefore upon keeping 
within the group or society employing the plan an increas- 
ing number of members, in order that as the policy-holders 
attain greater maturity of years and by death drop out, the 
20 



290 



PINAKCIAL INSTITUTIONS 



assessment may not rise to a prohibitive rate ; for if the 

society does not increase, with each death the number of 

survivors will proportionately decrease, and the rate of 

assessment would necessarily rise to meet future losses until 

the last survivor will be required to pay an assessment of 

$1,000 to the one next before liim, and he himself would 

be left without protection. 

Many examples of the working of this principle are 

found within what are known as fraternal and assessment 

insurance orders that provide no reserves for 

Assessment ^j^g payment of death claims. The Loyal 
insurance. f*^ •^ 

Mystic Legion of America is an association 

organized in 1892. The record of death-rates, together 
with the amount of insurance in force, is shown in the fol- 
lowing table : 





Year. 


Amount of insurance in force. 


Death-rate per 1,000. 


1897 


$5,419,000 
5,903,000 
6,:^50,000 
7,753,000 
8,560,500 


2.4 


1898. . 


3.9 


1899 


3.9 


1900. . 


4.2 


1901 


6.0 







Let us compare with this a society that was organized 
in 1879 which, as to insurance in force, rose to a high 
rank, (had outstanding something like $130,000,000 in 
risks,) but which in later years has been losing in numbers, 
and the average age of whose members has likewise largely 
increased. An exhibit covering the same period shows the 
following result: 



Year. 


Amount of insurance in force. 


Death-rate per 1.000. 


1897 


$51,612,500 
44,023,500 
37,294,500 
17,073,500 
10,736,500 


26-9 


1898 


30.2 


1899. 


32.0 


1900 

1901 


40.8 
43.3 







THE INSURANCE COMPANY 291 

These two societies may serve to illustrate the extremes 
in the working of a principle that is as certain as death 
itself. As stated before, the success of such an organization 
depends upon the numerical increase of its membership 
and the maintenance of a \ow pro rata (A old lives. When, 
however, there is an aging of members or a decrease in 
numbers and a consequent rise in the rate of assessment, 
the result is to drive out the young and healthy lives and 
leave to the order only those whose age or decrepitude 
makes it to their interest to remain and renders them unac- 
ceptable to other companies. 

The second principle around which the business of 
insurance is organized is that known as the "level pre- 
mium" plan. The assessment practise is based 

Tlie reserve ^^ what is known as the '* natural premium " — 
companies. i . , - ^ r f t i i 

that IS, the sum required lor actual death losses 

incurred from year to year. These, as before noticed, in- 
crease as the insured grow older. The level premium plan 
provides for the collection of more than is requisite for the 
payment of losses in the earlier years of the policy and the 
accumulation of a reserve made up of this excess, which, 
with interest, will be large enough to make up the defi- 
ciency of later years. This fund, or reserve, is invested, 
and the income from the investment is set apart in divi- 
dends to increase the total amount, so that with this interest 
and dividends the reserve shall be |1,000 at the age of 
ninety-nine years, this being considered the date of ter- 
mination of all policies. No better expose of the working 
of this principle may be found than that given in an address 
by Mr. J. W. Hamer before the Wharton School of Finance 
of the University of Pennsylvania : 

" As the reserve upon a policy increases, the amount at 
risk upon that policy decreases — the loss incurred at death 
being merely the difference between the accumulated re- 
serve and the face of the policy. 

" Perhaps a few figures will afford the best explanation. 



292 FINANCIAL INSTITUTIONS 

" The ordinary life table premium at age twenty-one is 
$17.90 per $1,000, reduced by dividends. These dividends, 
improperly so called, are not profits, but savings derived 
from three sources : 

" 1. Collection of an interest rate greater than the as- 
sumption. 

" 2. A saving upon mortality. 

" 3. A saving upon expenses. 

" The salvage from these items, as it might be termed, 
is, in a mutual company, ordinarily applied in reduction of 
the gross premium. To simplify our illustration, however, 
I will, with your permission, dismiss further consideration 
of dividends and assume that there are none. 

" Let us, then, turn back to the annual premium, age twenty-one of, |17. 90 
Deduct from this the apportionment for expenses, called the 

' loading,' which is 4.63 

Leaving the net premium $13 . 27 

Out of this net premium is provided the cost of the first years 

insurance 7.05 

The difference 16.22 

is the sum laid by at interest as the year's contribution to 
the reserve, reducing the amount at risk from $1,000 to 
$993.78. 
When this insured member has reached the age of fifty, he is 

charged the same net premium of 13.27 

The cost of insurance for this year has increased to IOlIO 

Leaving contribution to ' reserve ' $3.17 

"Previous years' additions, plus interest, have raised 
the reserve on this poUcy to $303, which, deducted from 
$1,000, the face of the policy, has diminished the amount 
at risk to $<-)97. 

"The insured member having attained the age of 
seventy-iive, is still charged the same net premium of 
$13.27. His reserve has reached $680.07, which, deducted 
from the face of the policy, $1,000, has brought the amount 
at risk down to $319.93, but at his advanced age the year's 



THE INSURANCE COMPANY 293 

charge for mortality upon even this small sum has become 
greater than the premium available. 

*' The account is then made up as follows : 

" Reserve at the end of the previous year $680.07 

Net premium, as before |13 . 27 

Interest added to the reserve ' 27. 73 

Total 41 .00 

Which also added to the reserve makes a grand total of. .... . $721.07 

Deduct the estimated cost of insurance for the current year 

upon $319. 93 27.06 

and you have a balance or reserve of $694. 01 

reducing the sum yet at risk to $305.99. 

" The same process is continued until age ninety-nine, 
when, under the actuary's table, with 4 per cent interest, 
the reserve equals the face of the policy. The various 
tables used are not identical, the American table, for in- 
stance, stopping at age ninety- five." 

Many kinds of policies are offered involving combina- 
tions of assessment and reserve, of endowment and annuity. 
Application ^^ ordinary life, tontine, and other plans, l)ut 
of the two through them and in them all may be found 
life insur- ^^^ ^r both of these two principles. The 
ance. " level premium " plan, with its reserve, offers 

to the insured a perfect security against loss whether mem- 
bership increases or decreases so long as the reserve be 
perfectly protected, and the laws of the several States 
have been framed to secure this end. The rate of insur- 
ance on the level premium plan for the earlier years of 
the policy is higher than that of the assessment or " natural 
premium " plan, yet with this increased rate it offers a se- 
curity which eliminates speculative risk involved in the 
futurity of the company itself. 

Other plans of organization and adaptations to particu- 
lar lines of insurance might be discussed, but the few pages 
here given to the subject will allow of nothing more than 
a presentation of principles involved. The enormous re- 



294 . FINANCIAL INSTITUTIONS 

serves kept bj the life insurance companies; the capital 
and surplus invested in fire, marine, and other forms of 
The financial insurance organizations; the resources that are 
side of deemed essential to security and to the eUmina- 

msurance. ^^^^ ^f ^^^ element of speculation from a busi- 
ness whose purpose it is to take over the burdens of specu- 
lative risks, have all contributed to make insurance com- 
panies the largest investors and the most conservative 
financial concerns in business life. The risks undertaken 
by insurance companies in the United States amount to 
between fifteen and twenty billions of dollars. The re- 
sources in the hands of the life-insurance companies alone 
on January 1, 1901, amounted to $1,754,662,712. These 
companies have a premium income of $324,723,954 per 
annum, and from their investments an additional income 
in the form of interest and rentals amounting to $75,- 
874,303, making a total annual income of over $400,- 
000,000. In capital stock within ten years, from 1890 to 
1900, the increase has been over 50 per cent, while the 
annual income has increased from $196,938,069 to $400,- 
603,258. The expense of management for the same years 
increased from $44,190,352 to $98,892,499. The excess of 
income over expenditure, including death losses, for the 
same years show the following remarkable increase : In 
1890, $62,729,898; in 1900, $133,023,157. This excess of 
income over expenditure indicates the enormous increment 
that is annually being added to that part of life insurance 
based on the level premium plan. Within the ten years 
above mentioned the admitted assets of the 76 companies 
now operating under the reserve plan has increased from 
The invest- *'^'^0?9'^2,061 to $1,742,414,173 ; in other words, 
ments of within ten years they have added one billion 

insurance dollars to their assets. 

companies. _,, i i i i i • ^ i 

These assets are very largely held m the 

form of investments. A classification of investments is 

as follows : 



THE INSURANCE COMPANY 295 

Real estate |158,119,116 

Mortgages 501,498,988 

United States bonds 7,190,565 

Other stocks and bonds 794,631,743 

Collateral loans 64,488,774 

Premium notes and loans 88,500,575 

Total $1,614,429,761 

Besides these items there appears among the assets of 
companies what is termed "cash in office and in bank." 
This item has a peculiar status. The laws of 
items of ^^^ several States require the insurance com- 

insurance panies to make a statement of investments, 
c mpani s. g^ggg^g^ liabilities, etc., in order that there may 
be a published record of their doings. Furthermore, the 
various States have appointed special officers for the in- 
vestigation of the condition of insurance companies for 
the protection of policy-holders. In the rivalry between 
insurance companies a point is made of the -character of 
their assets. I^early all of the insurance concerns make 
advances to their agents. With the numerous agencies 
scattered through the country small advances made to 
each will amount to millions in the aggregate. In order 
that these advances may not appear in their true light 
— in other words, tliat it may not be placed on record that 
they are doing business in this way — many of the large 
insurance companies, being in control of banking institu- 
tions, take to the banks under their control the notes of the 
various agents on which advances have been made and, for 
the purpose of the statement made to the public, tempo- 
rarily discount these notes and have the amounts entered to 
their account as cash credits. These are then canceled by 
the return of the notes when convenience may serve after 
they have performed the service intended. While this 
may, in ordinary business experience, be considered an ille- 
gitimate practise, yet the practise itself has arisen very 
largely out of the rivalry between companies and the tend- 
ency of certain unintelligent inspectors to interfere in 



296 FINANCIAL INSTITUTIONS 

what may be considered a legitimate business arrangement, 
and one which does not necessarily jeopardize any of the 
interests of policy-holders or of stockholders. 

With the enormous holdings in stocks and bonds, and 
with investments in such securities limited by statute of the 
Insurance several States, it may be well understood how 
companies as it is that what are called " sjilt edge " stocks 

factors in jui j ^ '~ j. x • j. ^ 

the security ^^^ Donds command a low rate oi mterest or 
market. dividend return on market price paid. The 

successful investment agent or investment manager of a 
large insurance company keeps his eye constantly open for 
opportunity to invest in accredited stocks and bonds at a 
rate that will return to his company an income which will 
produce a dividend to policy-holders and to stockholders. 
Moreover, a certain pro rata of the funds of insurance com- 
panies are loaned to speculators on what may be termed 
"call" or "collateral" loans. These have as collateral 
security listed stocks and bonds. The Equitable of 'New 
York, for example, has outstanding on collateral loans $25,- 
371,587, over one-third of all the collateral loans of the 
combined companies. Let us suppose that a margin of ten 
per cent is allowed between the market price of securities 
held as collaterals and the amount of advance. For a com- 
pany safely to make loans on a kind of collateral that is 
constantly fluctuating with the movements of market price, 
it is incumbent upon an institution making such loans — 
and most of the old line companies do make advances of 
this kind — constantly to keep watch of the market in 
order that the margin of safety may not be impaired. The 
usual custom is for such a company to have a corps of clerks 
whose duty it is to keep a constant record of all the 
stocks and bonds in which it is interested. This also 
serves the company as a record from which investment cal- 
culations may be made. Such power have the combined 
insurance companies in the market that were they to con- 
spire to such an end, every financial concern in the country 



THE INSURANCE COMPANY 297 

might be brought to a condition of distress, possibly of 
bankruptcy. On the other hand, with the strong support 
of such companies the market, financial institutions, and 
the Government itself hnd in insurance companies the 
greatest financial security. The effect of the enormous 
risks undertaken by the insurance companies, therefore, is 
not only to relieve the business world of speculative uncer- 
tainty in the numerous relations to which it is applied, but 
also, by the financial conservatism adopted to secure this 
end, the investment companies assist very materially in 
steadying the market and, in time of strain, relieving finan- 
cial distress. 



IISTDEX 



Accornmodation, signature to note, 120 ; 

accommodation mortgage, 156. 
Appropriation, funds obtained by, 87, 88. 
Assigriment of note, 121. 

Balance-sheet, 152. 

Bank draft. Bank of the United States, 
67. 

Bank of the United States, illustration 
of note of first bank, 42 ; illustration 
of note of second bank, 43 ; illustra- 
tration of check drawn by Andrew 
Jackson on, 57 ; illustration of check 
drawn by Daniel Webster on the 
Boston branch, 58 ; draft of, 67 ; un- 
secured bond of, 167. 

Bill of lading, attached to draft, 143. 

Bonds Form of bond, 163 ; Trust 
Company as agent of sale and trans- 
fer of bond issue, 164; private bonds, 
165; unsecured bonds, 165; how 
bonds differ from other credit instru- 
ments, 169; security used in bond 
issues: (1) personal security of in- 
dorsement and guarantee, 169, 170; 
guarantee of Reading Terminal bond, 
171; indorsement of bond, 172; (2) 
lien security, trustee necessary to lien 
security, 172; who may be trustee, 
173 ; how corporate bonds difler from 
corporate shares, 173 ; real - estate 
bonds, 168, 174 ; general mortgage 
bond, 174 ; general mortgage of the 
Reading Company, 175 ; blanket 
mortgage bonds and consolidated 
mortgage bonds, 174-176 ; divisional 
bonds, 176 ; Collateral Trust bonds, 



176 ; equipment bond, 178 ; car- 
trust bond, 177-179 ; car-trust bond 
of Railroad Equipment Company, 
177 ; of American Transportation 
Company, 179 ; debenture bond of 
Financial Company, 179-189 ; deben- 
tures of railroads, 181 ; income bonds, 
and how they differ from preferred 
stock, 181, 182 ; purchase-money 
bonds, 183 : improvement bonds, 183 ; 
gold bonds and legal-tender bonds, 
183 ; coupon bonds as distinguished 
from registered bonds, 188; payment 
and extension of bonds, 185 ; bond 
extension contract, 188. 

Broker. The note-broker, 265 ; foreign- 
exchange broker, 268 ; the stock- 
broker, 269 ; the produce-broker, 269 ; 
other forms of broking, 269. 

Broker and brokers' board, 265-279. 

Broking. Nature of broking business, 
265 ; oi-ganization of broker's office, 
276 ; speculative side of broking, 276 ; 
distinction between investment and 
speculation, 277 ; the speculative con- 
stituency, 277 ; board-room of Haiglit, 
Freese & Co., 278; the bucket-shop, 
279 ; chart of private wires of Haight, 
Freese & Co., 280. 

Bucket-shop, 279. 

Building Loan Association, 229-238; 
service of the building loan associa- 
tion, 229 ; distinguishing features of 
the building loan association, 230 ; 
conditions out of which the institu- 
tion arose, 231 ; the first building 
loan association, the growth and pres- 



300 



INDEX 



ent importance of the institution, 
232 ; plans for making loans : (1) loans 
at fixed rate by lot; (2) sales at auc- 
tion on bids of advance interest; (3) 
awards to bidders of highest pre- 
miums on dues, 233 ; plans for the 
distribution of profits, 234 ; how 
profits are computed, 235, 236 ; how 
profits are shared, 237 : plans for the 
withdrawal of funds, 238. 
Business, What is business ? 3 ; viewed 
as a contest for gains, 4; necessity 
for law and order in business, 4 ; 
business law, 5 ; elements of success 
in business, 6 ; funds a necessary 
part to business equipment, 7 ; rela- 
tion of finance to business, 7-8. 

Capitalist, definition, 12; functions of, 
90. 

Carnegie, Andrew, his theory of trus- 
teeship as applied to inheritances, 
83-85. 

Cashier's check, 66. 

Certificate of indebtedness, Chatta- 
nooga Savings Bank, 46. 

Certified check, 65. 

Cheque-bank check, 65. 

Clearing-House certificate, 46. 

Coal -shipper's check, 61. 

Collateral gold certificates, 160, 161. 

Collateral gold receipt, 160. 

Collateral note, 123, 124; collateral 
judgment note, 126. 

Collateral trust certificate of Asphalt 
Co., 162. 

Commercial Banks. The commercial 
bank as a financial institution, 240 ; 
obstacles to business without a bank, 
241 ; services of the commercial bank 
in a community, 240-247 ; profits of 
the commercial bank, 247, 248 ; equip- 
ment of the commercial bank, 249, 
250 ; profits derived from invest- 
ment of salable credit, 251 ; kinds of 
investment it may make, 252, 253 ; 
magnitude of commercial banking 
businesa, 254. 



Commercial Paper. Sales of, as a means 
of obtaining funds, 109-148 ; promis- 
sory note, 111. (See Promissory 
Note.) 

Copper-sheet money, illustration, 19. 

Corporation. Financial advantage of 
corporate organization, 100 ; corpo- 
rate shares, 96-108. 

Credit. Definition of, 30 ; credit funds, 
30-54 ; instruments of transfer of 
credit funds, 55-76 ; place of credit 
in modern finance, 74-76. 

Credit funds. Definition of credit, 30 ; 
illustrations of credit uses, 30 ; credit 
used as current funds, 31 ; essential 
characteristics of credit, 33 ; princi- 
ples of exchange as applied to credit, 
34 ; value and price of credit, 35 ; basis 
of judgment as to value of credit, 35 ; 
result of favorable judgment as to 
value of credit, 36 ; *•' security " and 
its relation to the value of credit, 36, 
37 ; credit viewed as a short sale of 
money, 37-41 ; financial uses of credit, 
41 ; forms of credit used as funds, 
41 ; bank credit, 42-45 ; bank-notes, 
42-44 ; bank accounts, 45 ; emergency 
bank currency, 45, 46 ; commercial 
emergency currency, 47 ; scrip, 47- 
50 ; public emergency currency, 50- 
52; commercial credit funds, 52-54; 
current credit accounts, 54; mutual 
credit accounts, 54 ; transfer of credit 
funds (see Instruments of Transfer). 

" Credit the drawer" note, 118, 119. 

Crossed check, 64.- 

Definitions. Business, 3, 4 ; finance, 7 
funds, 12 ; maintenance fund, 12 
capital funds, 12 ; safe deposit, 12 
capitalist, 12; financier, 12; funded 
debt, 12 ; a dollar, 25 ; a silver dollar, 
26 ; greenback, 27 ; national bank- 
note, 27 ; credit, 30 ; credit security. 
36 ; short sale, 37 ; bankruptcy, 41 ; 
panic, 41 ; capital stock, 96 ; stock 
certificate, 98 ; common stock, 100 ; 
preferred stock, 104 ; promissory 



INDEX 



301 



note, 111 ; protest, 129 ; commercial 
draft, 137; mortgage, 153, 156 ; bond, 
162 ; insurance, 282 ; investment, 
277 ; speculation, 278. 

Dividend check, 61. 

Documented bill, 142-146. 

Dollar. What is a dollar? 25; gold 
dollar, 25 ; silver dollar, 26. 

Emergency currency of banks, 45 ; 
commercial emergency currency, 47- 
50 ; public emergency currency, 50- 
52. 

Exchange as a method of acquiring 
property, 2 ; importance of funds as a 
medium of exchange, 3 ; funds ob- 
tained by exchange, 89-191 ; ex- 
change of labor for funds, 90-92; 
exchange of tangible property and 
business interests for funds, 92-108 ; 
exchange of commercial credit for 
funds, 109-148 ; exchange of long- 
time paper for funds, 149-191. 

Exchange Bank of St. Louis, note of, 
44. 

Finance. Definition of, 7 ; the relation 
of funds to finance, 7 place of credit 
in modern finance, 74. 

Floor plan of Philadelphia Stock Ex- 
change, 275. 

Funded debt, definition of, 12. 

Funding, example of, 11 ; limits to 
funding power, 89. 

Funds. Importance of funds for ex- 
change, 3 ; funds as a part of busi- 
ness equipment, 7 ; funds the subject 
of finance, 7-8 ; money funds, 11-29; 
definition of funds, 12 ; credit funds, 
30-54; insuuments of transfer of 
credit funds, 55-76 ; how funds are 
obtained, 79-190 ; funding institu- 
tions and agents, 195-297. 

Gift. As a means of acquiring prop- 
erty, 1 ; the method of non - in- 
dustrial and dependent members of 
society, 79 ; its use in the family 
organization, 79 ; between members 



of tribes, 80 ; for support of other 
non-industrial groups, 80, 81 ; gift, 
the funding method of dependents, 
81 ; usually takes the form of funds, 
82. 

Gift and inheritance, funds obtained 
by, 79-87; industrial importance of- 
gift and inheritance, 85. 

Guarantee, as a form of personal secur- 
ity, 122 ; example of guarantee by 
indorsement, 122 ; guarantee by sep- 
arate writing, 122 ; guarantee as a 
form of security to bond issue, 169- 
174 ; forms of guarantee to bonds, 
172 ; insurance as a form of guaran- 
tee, 282. 

Haight, Freese & Co., Philadelphia 
board-room of, 278 ; chart of private 
wires of, 280. 

Inheritance as a form of gift, 82 ; the 
assumption on which inheritance 
rests, 82, 83 ; principle of trusteeship 
applied to inheritance by Mr. Car- 
negie, 83-85 ; laws of, 86. 

Instruments of transfer of credit funds, 
55-76 ; customer's check, 55-62 ; 
form of, 56 ; manner of drawing, 56- 
59 ; check of Andrew Jackson, 57 ; 
check of Daniel Webster, 58 ; checks 
drawn for special purposes : for 
wages, 60 ; dividend check, 61 ; coal- 
shipper check, 61 ; safety devices in 
checks, 61 ; receipts used as checks, 
62 ; power of attorney to draw, 62, 
63 ; the crossed check, 63, 64 ; cheque- 
bank check, 65 ; certified check, 65 ; 
cashier's check, 66 ; bank draft, 66, 
67 ; letter of credit, 67-70 ; money 
order, 68 ; traveler's check, 70-73 ; 
interchangeable bank money-order, 
73, 74. 

Insurance. Meaning of insurance, 282 ; 
guarantee of payment of promissory 
note a species of insurance, the es- 
sentials of an insurance policy, 282. 

Insurance Company. Credit insur- 



302 



INDEX 



ance, 282 ; risk involved on account 
of non-payment of contracts, the 
credit insurance company, 282, 283 ; 
the principle of community responsi- 
bility applied to credit insurance, 
284 ; the security insurance com- 
pany, 284 ; the insurance company a 
guarantee of sufficient security for 
payment of credit contracts, 284 ; title 
insurance, 284 ; advantages of this 
form of guarantee, 285 ; equipment for 
title insurance, 285 ; other forms of 
risk made the basis of insurance, the 
speculative character of individual 
risk, and the certainty of calculation 
as to collective risks, 286 ; safety of 
insurance based on principle of col- 
lective risk, 287 ; the effect of insur- 
ance to relieve the business commu- 
nity of speculative individual risk, 
288 ; application of principle of col- 
lective risk to life insurance, 288 ; 
the mortality table the scientific basis 
of life insurance, 289 ; two methods 
of enforcing collective financial risk : 
(1) the "assessment method," (2) 
the " level premium " plan, 289 ; con- 
ditions under which the assessment 
method may be applied, 290 ; applica- 
tion of the level premium plan, 291 ; 
the reserve as an incident to this plan, 
291-297 ; financial side of insurance, 
294; investments of insurance com- 
panies, 294-295 ; significance of what 
are known as " cash items," 295 ; in- 
surance companies as factors in the 
security market, 296, 297. 

Insurance policy attached to bill of 
lading, 144. 

Investment distinguished from specu- 
lation, 277. 

Invoice accompanying documented 
bill, 142. 

" Ironclad " note, 123. 

Jackson, Andrew, check on Bank of 

the United States, 57. 
Judgment note, 125. 



Labor. Exchange of labor for funds, 
90 ; the problem of the laborer, 90, 
91 ; saving as a means of obtaining 
capital, 91 ; importance of education 
and industrial training to the laborer, 
92. 

Lease. Kelation of the lease to funding 
methods, 189 ; the lease as security 
for credit, 190 ; uses of the lease by 
credit stores, 1 90 ; dangers from lease 
purchasers, 191. 

Letter of credit, 69 ; draft list to letter 
of credit, 70. 

Long-time Paper. Long-time credit used 
to obtain funds for capital employ- 
ment, 149 ; illustrations of difference 
between long-time and short-time 
credit, 150 ; difference in character 
of security, 151 ; classes of long-time 
credit: (1) mortgages, 153-161; (2) 
bonds, 162-185. 

Memorandum, of note purchase, 267 ; 
of note sale, 267. 

Memorandum note, 124. 

Mint. (See Treasury of the United 
States.) 

Money Funds. Definition of funds, 
12 ; essential characteristics of money, 
13, 14; conditions on which funda- 
bility and value of money depend, 
14-16 ; things that have heen used as 
money, 16-21 ; the development of a 
standard, 22; the decimal system, 
24 ; money system of tlie United 
States, 25-29. 

Money-order of Adams Express Co., 
68 ; interchangeable bank money- 
order, 74. 

Money system of the United States, 25 ; 
gold coins of United States, 26 ; sil- 
ver coins, 26 ; minor coins, 26 ; 
United States notes, 27 ; national 
bank-note, 27 ; gold certificates, 27 ; 
sil rev certificates, 28 ; Treasury notes 
of 1890, 28 ; currency certificates, 28 ; 
fractional currency notes, 28 ; uni- 
formity of value of, 29. 



INDEX 



303 



Mortgage notes, 154. 

Mortgages. The term as used in the 
security market a misnomer, 153 ; 
illustration of mortgage note, 154; 
mortgage contract, 155; mortgages 
without separate notes, 156 ; accom- 
modation mortgages, 156 ; chattel 
mortgages, 157 ; farm mortgages, 
157 ; mortgages on business property, 
159 ; on mines and timber-lands, 159 ; 
parti-mortgages receipt, 161. 

Parti-mortgage receipt, 158. 

Partnership— sale of partnership in- 
terest for funds, 95. 

Philadelphia Savings Fund Society, 
224. 

Power of attorney, Daniel Webster 
to his wife, to draw checks, 63. 

Promissory Note. Definition, 111 ; form 
of note as to parties, 111, 112 ; as to 
words of transferability, 113 ; as to 
words of promise, 134; as to date of 
making note, 115 ; as to signature, 
116 ; non-essential clauses of promis- 
sory note, 117 ; "credit the drawer" 
notes, 118, 119 ; parts of note contain- 
ing contracts of security, 120 ; ac- 
commodation signatures and indorse- 
ment, 120, 121 ; guarantee of note, 
122; collateral note, 123 ; memoran- 
dum collateral note, 124; judgment 
note, 125 ; collateral judgment note, 
126 ; presentation for payment, non- 
payment, and protest, 126-132. 

Property, development of the idea of, 
to respect for " rights of property," 
race importance of, 1 ; how property 
may be acquired from others : (1) by 
gift; (2) by exchange, 1, 2. 

Protest of note, 130; notarial notice of 
protest, 130 ; notarial certificate of 
protest, 131. 

Eeceipt cut for money deposited on 
bond purchase, 165; on purchase of 
Glen Echo Eailroad bonds, 166. 

Eeceipt used as check, 62. 



Eeceiver's Certificates. Their nature 
and their uses, 187; distinguished 
from bonds, 187 ; security for, 188 ; 
advantages of use, 189. 

Eelease from liability on indorsement, 
266. 

Savings - Bank, 209-228 ; successful 
business based on service rendered, 
209-211 ; increased profits the result 
of increased capital, 211 ; savings as 
a means of obtaining capital, 212- 
214; service of the savings-bank: 
(1) safe-keeping of funds saved; (2) 
investment of savings in a form to 
make them productive of income, 
215, 216; conditions giving rise to 
savings institutions, 216 ; first sav- 
ings-banks, 217 ; the safe-keeping of 
funds, 218 ; the investment of sav- 
ings, 218, 219 ; how to deal with a 
savings-bank, 221 ; rules governing 
investment of savings-banks : (1) as 
to safety of investment; (2) as to 
rate of income, 223 ; Philadelphia 
Savings Fund Society and the Na- 
tion's Bank of Savings of Allegheny, 
224 ; mutual and joint-stock savings- 
bank, 225, 226 ; relations of savings- 
banks to the money system : (1) re- 
duction of the amount of money kept 
in hoards ; (2) infiuence on redemp- 
tions of the Government; (3) the 
savings-bank as purchaser of securi- 
ties, 226 ; relation of savings-banks 
to other financial institutions, 227, 
228. 

Scrip. Of Easton & Wilkesbarre 
Turnpike Co., 47 ; sutler's scrip, 47 ; 
store scrip, 48; Camden & Wood- 
bury Eailroad scrip, 48; Chesapeake 
& Ohio Canal, 49 ; Marion Change 
Association, 49 ; dividend warrant, 
50 ; town scrip, Fayetteville, Ark., 
51 : Port Deposit, Pa., 52.. 

Securities. (See Long-Time Paper.) 

Securities ; definition of, 36 ; relation 
of security to valuation of credit, 36, 



304 



INDEX 



37 ; parts of promissory note contain- 
ing contracts of security, 120-126. 

Shares. (See Stock.) Sale of corporate 
shares, 95 ; difference between cor- 
porate shares and partnership inter- 
ests, 98. 

Shinplasters. (See Scrip.) 

Silver-sheet money, illustration, 23. 

Speculation, distinguished from in- 
vestment, 277. 

Stock. Illustration of share in Bank of 
the United States, 97 ; common stock 
of United States Steel Co., 99 ; non- 
cumulative preferred stock, 101 ; 
common stock of Gramercy Finance 
Co., 102 ; preferred stock, cumulative, 
of Gramercy Finance Co., 103 ; sig- 
nificance of common stock, 100; of 
preferred stock, 104 ; first and second 
preferred stock, 106 ; cumulative and 
non-cumulative preferred stock, 106; 
trust certificates, 108 ; other forms of 
stock, 108. 

Stock Exchange. Stock-brokers, 269 ; 
brokers' boards, 270 ; history of stock- 
exchanges, Philadelphia board, 270; 
London Stock Exchange, 270 ; New 
York Stock Exchange, 271 ; Consoli- 
dated Stock and Petroleum Exchange, 
272 ; organization of a stock ex- 
change, 273, 274 ; floor-plan of, 274, 
275. 

Tioga County Bank, note of, 44. 

Traveler's Check Of American Express 
Co., 70 ; of Brown Bros., 71, 72 ; of 
Knauth Nachod & Ktihne, 73. 

Treasury of the United States, 195- 
208; relations of Treasury to mod- 
ern systems of finance, 195 ; its mon- 
etary functions: (1) coinage, 196; 
(2) providing a complex system of 
money ; (3) maintenance of a stand- 
ard as a means of securing uniform- 
ity of value, 197 ; the redemption of 
paper money, 198; machinery by 
which the three monetary functions 
of Government are performed: (1) 



a mint for giving stamp and genuine- 
ness to coins ; (2) a redemption 
agency for the free interchange of 
different forms of money ; (3) a rev- 
enue department to provide and 
maintain funds in reserve, 198 ; his- 
tory of the Independent Treasury, 
199-200; work of its redemption 
agency, 201-203 ; the mint, its work, 
and organization, 203-205 ; revenue 
department of the Treasury ; relations 
of revenue to reserve, 205 ; possible 
demands on the Treasury for gold, 
206 ; sources of revenue : (1) taxa- 
tion ; (2) sales of quick assets; (3) 
sales of bonds of the Government, 
207 ; inadequacy of taxation, 207 ; 
unavailability of quick assets, 208; 
bond sales the only adequate revenue 
power in time of strain, 208 ; relation 
of Treasury to private credit. 

Trust certificate, 108 ; of Standard Oil 
Co., 105 ; first preferred, of Heading 
Co., 107. 

Trust Company. As agents of sale and 
transfer of bond issue, 164; service 
of the trust company, 256 ; its econo- 
mies, 257 ; conditions out of which 
institutions arose, 258 ; methods of 
organization, 258; legal steps re- 
quired in N ew York, 259, 260 ; general 
trust powers granted, 261 ; fiscal 
powers of the trust companies, 262; 
investment powers, 262, 263 ; growth 
of business of, 263; double invest- 
ment relations of, 263, 264. 

Value and price of credit, 35 ; basis of 
judgment as to value of credit, 35; 
result of favorable judgment as to 
value of credit, 36 ; security and its 
relation to the value of credit, 36, 37. 

Wages check of Lehigh Valley Rail- 
road, CO. 

Webster, Daniel, check on Boston 
Branch of Bank of the United States, 
58. 



SEP 23 1903 



